The impact of forward guidance and large-scale asset purchase programs on commodity markets

Pedro Gomis-Porqueras; Shuddhasattwa Rafiq; Wenying Yao

doi:10.1515/snde-2021-0018

Abstract

This paper investigates how different commodity prices are affected by unconventional monetary policies (UMP) implemented by the Federal Reserve of the United States as a response to the Global Financial Crisis. We analyze impulse responses using local projections and identify UMP shocks through high-frequency identification strategy. We show that forward guidance (FG) and large-scale asset purchase (LSAP) shocks lead to distinct responses when analyzing commodity prices. We find that asset-like commodities, such as gold and silver, respond to these UMP shocks most aggressively. While an easing FG shock leads to increases in their prices, an easing LSAP shock has the opposite effect. This differential response suggests that these asset-like commodities are being used as inflation and exchange rate hedges. In contrast, production-like and agricultural commodities respond to UMP shocks in the same way as conventional monetary policy shocks. Consistent with previous literature, we find that easing LSAP shocks, to some extent, signal a negative economic outlook. Policymakers can exploit the responses from the various commodity classes examined in this paper when evaluating the effectiveness of monetary policy in different sectors of the economy.

Keywords: commodity price; impulse response analysis; unconventional monetary policy

Corresponding author: Wenying Yao, Melbourne Business School, University of Melbourne, Carlton, VIC 3053, Australia, E-mail: W.Yao@mbs.edu

Acknowledgement

We are particularly grateful Eric Swanson for providing the data, and to Christopher Neely, Michael Owyang, Adrian Pagan, and participants at the 2019 Workshop of the Australasian Macroeconomic Society for their comments on earlier versions of the paper. We also would like to thank the editor and two anonymous referees for their valuable feedback. The views expressed herein are solely the responsibility of the authors.

Author contribution: All the authors have accepted responsibility for the entire content of this submitted manuscript and approved submission.
Research funding: None declared.
Conflict of interest statement: The authors declare no conflicts of interest regarding this article.

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Supplementary Material

The online version of this article offers supplementary material (https://doi.org/10.1515/snde-2021-0018).

Received: 2021-02-09

Revised: 2022-07-21

Accepted: 2022-08-21

Published Online: 2022-09-12

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