Monetary conditions and metal prices

Abstract

The monetary easing of the past few years by the world’s major central banks through conventional and unconventional policies coincided with the longest and broadest commodity price boom since the Second World War. And not surprisingly, the impending normalization of monetary conditions has created expectations of a likely reversal in commodity price trends. Based on a reduced form, price-determination model which accounts for all quantifiable sectoral and macroeconomic fundamentals, this note finds that the effect of short-term interest rates on metal prices is mixed and modest. But, changes in longer term rates have a positive and highly significant impact. The note also concludes that metal prices respond (in that order) to industrial production, input prices, US dollar movements and physical stocks of metals.

Keywords:

• commodity price boom
• interest rates
• metal prices
• monetary conditions

JEL Classification:

• E31
• O13
• Q02
• Q11
• Q39

Acknowledgements

The views expressed here are those of the authors and should not be attributed to the World Bank. We would like to thank Ataman Aksoy and Costas Christou for helpful comments and suggestions on an earlier draft.

Notes

¹ The MUV is often used as a measure of ‘international’ deflator. However, as Houthakker (1975) noted it is preferable to include it as an explanatory variable so that the homogeneity restriction is tested – instead of assumed.