China’s Monetary Policy and Commodity Prices

This paper examines the effects of the monetary policy of China on commodity prices. Using a Bayesian Structural VAR, we identify shocks to the interest rate as a price rule and to the monetary aggregate (M2) as a quantity rule, and then evaluate their impacts on commodity prices. Those prices include the aggre- gate commodity price index and all its major constituents. Our results suggest that a positive interest rate (contractionary) shock has a negative and persistent effect on commodity prices. Additionally, the bever- ages and metals are the commodities whose prices fall by most in response to changes in the Chinese monetary policy. In what concerns the positive shock to the growth rate of the monetary aggregate, we find that although it does not have a significant impact on the commodity price aggregate, such result “hides” important heterogeneity across different types of commodity prices. Finally, we show that while adjusting the growth rate of the monetary aggregate and changing the interest rates appear to be macroe- conomic stabilizing tools of similar power, the price instrument seems more effective in explaining the dynamics of commodity prices than the quantity one.