Commodities and monetary policy—the role of interest rates revisited

Abstract

In this study, we examine whether and how the impact of monetary policy on commodity markets changed due to the unconventional monetary policy actions, such as large-scale asset purchase programs and forward guidance, implemented by the Federal Reserve when the interest rate reached its zero lower bound (ZLB) posterior to the financial crisis. Utilizing a structural vector autoregressive (SVAR) model and a sub-period analysis, we identify a significant influence of interest rates on commodity prices before the crisis, with a contractionary monetary policy shock leading to rising prices. However, during the ZLB period, unconventional monetary policy shocks resulted in declining commodity prices, highlighting a directional shift. Our findings underscore the role of monetary policy mechanisms in shaping commodity markets and reveal variations across commodity classes, particularly industrial metals and precious metals. These insights hold practical implications for investors and policymakers.