How the Financial Market Can Dampen the Effects of Commodity Price Shocks

Commodities have begun to function as an asset class during the past decade, as trading in commodity derivatives has increased massively since the 2000s. This paper studies the role of commodities as an asset class in accounting for the recently lessened impacts of commodity price shocks on the economy, by constructing a model with financial frictions and with financial intermediaries that own two assets – tied to commodities as well as to capital. Simulation results of the model show that financial intermediaries' holdings of commodities as assets have contributed to the recent reduction in the effects of commodity price shocks