Factoring Emerging Markets into the Relationship Between Commodities and Global Liquidity Steven Landgraf WPPI Energy and Marquette University Abdur Chowdhury Marquette University USAEE/IAEE North American Conference Tuesday Oct 11 th , 2011
Transcript
Slide 1
Steven Landgraf WPPI Energy and Marquette University Abdur
Chowdhury Marquette University USAEE/IAEE North American Conference
Tuesday Oct 11 th, 2011
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Commodity price bubble (2003 2008) Record high oil and natural
gas prices Ultra low interest rates, 2003-2004 Accelerated EM
economic growth Financialization of commodity markets
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Commodity price recovery post financial crisis (2009- )
Near-zero interest rate policies in advanced countries Massive
injections of liquidity during the financial crisis (Quantitative
Easing). QE2 (late 2010 to mid 2011)
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Backlash in the media against QE2 Coincided with run-ups in
prices of oil, gold, food, etc. Roubini: Wall of liquidity chasing
assets in EMs Continued strong performance of EMs after 2008 fueled
commodity demand Not much global research incorporates BRIC
influence
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Frankel (1986, 2008) Overshooting model Monetary variables and
commodity prices related Sousa and Zaghini (2004, 2006) Global
monetary shocks have long-run impacts on domestic prices Rffer and
Stracca (2006) Excess liquidity impacts prices in advanced
countries Belke et. al. (2010) Expansionary shocks increase
relative prices
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Does excess liquidity positively impact commodity prices? Which
effect is more prominent: Demand channel? Excess liquidity? Do the
results change if emerging market data is included in the global
aggregate?
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ADV aggregates 10 advanced economies and the euro zone
economies ALL aggregates the BRIC countries in addition to the
countries in ADV
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Output (demand channel) impacts commodity prices robust result
Excess liquidity, interest rate mixed results Interest rate little
influence Shocks to excess liquidity more prominent than shocks to
output in ALL opposite of ADV
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Vector Error-Correction Granger causality Impulse Response
Function (IRF) Variance Decomposition (VDC) GDP Sum of GDP (demand
channel) MON Sum of broad money supply divided by GDP sum (excess
liquidity) INT GDP-weighted average of S-T (3 mo) interest rate CPI
GDP-weighted average of headline CPI COM Commodity price index
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Log-difference (except interest rate) Sample: 1995Q2 to 2010Q3
Sourced mostly from IMF Supplemented with World Bank data for some
BRIC countries Aggregation methodology follows Sousa and Zaghini
(2004) PPP exchange rates Commodity Index: S&P GSCI 66%
weighted with energy commodities
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Lag length (Info criterion and LM test) ADV: 2 ALL: 3 Unit root
tests: stationary in 1 st diff. Cointegration: tests suggest its
presence Appropriate to use a VEC vs. a VAR Long-run equilibrium
exists between variables
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Demand channel (GDP) robustly impacts commodity prices whether
or not BRICs are included. Granger, IRF, VDCs support Structural
relationship between output and commodity prices Prices also
respond positively to positive shocks
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Neither interest rates nor excess liquidity Granger cause
commodity prices Positive shocks (1 std. dev.) ADV: increase
commodity prices 2 quarters out ALL: increase commodity prices 6
and 7 quarters out
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VDCs show discrepancies between ADV and ALL Excluding BRIC data
overestimates impact of demand channel and underestimates excess
liquidity
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Shock to GDP QuarterADVALL 112%23% 230%32% 327% 434%24% 536%24%
634%21% 737%17% 837%18% 936%16% 1037%17% Shock to MON QuarterADVALL
11% 29%7% 38%9% 412%25% 511%25% 611%34% 711%42% 811%42% 911%46%
1011%46%
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ADV: ALL:
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ADV: ALL:
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BRIC country economies impact commodity prices in a way not
captured by using advanced country data Global liquidity shocks
have a great impact on prices when country sample is expanded
beyond advanced countries Suggests a diminished role of advanced
countries in impacting prices
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Central Banks should continue to closely monitor emerging
market monetary policy when considering effects on commodity and
energy markets Research coming from a global standpoint should not
exclude emerging markets from analyses Subject to data
availability
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Interest rates not shown to have a measurable impact on
commodity prices Contrasts with the literature Average a good
measure? Some use LIBOR Relatively low degrees of freedom Data
quality Evidence of monetary impacts not overwhelming