Global Liquidity and Commodity Prices

While monetary easing in major economies and the greater participation of financial institutions in commodity trading have enhanced the financialization of commodity markets since the global financial crisis, this paper empirically investigates whether the impact of global liquidity on commodity prices has grown since the crisis. For the agricultural products, energy and metals sectors, this paper uses a structural vector autoregression model of commodity supply, demand and prices with global liquidity to address the short-run relationship between global liquidity and commodity prices. The key finding is that the effect of global liquidity has been more pronounced for energy and metals commodity prices since the global financial crisis. This paper also suggests a price-based liquidity measure has a greater explanatory power for the commodity price dynamics than commonly-used monetary aggregates in the post-crisis period.