A Study On The Relationship Between Unconventional Monetary Policy And Commodity Prices During The Financial Crisis

It has been more than6years since the collapse of Lehman Brothers, which isgenerally regarded as a trigger of the2008“Great Depression”. During the past years,many developed economies such as the United States, Britain, Japan, and the Eruo Areaadopted a basket of unconventional monetary policies (UMPs) to prevent the furtherslump of economy after the interest rates had fallen down to the zero lower bound.These policies are typically characterized by a large-scale central-bank balance sheetalong with forward guidance. This paper assesses the effects of UMPs on commodityprices and the transmission of it by estimating several unconstrained VAR models withmonthly data based on three advanced economies including the United States, Britainand the Euro Area, over a sample spanning the period from January,2008to June,2014.The structure of this paper described as follows, firstly, based on the systematicalreviews and summarization of the existing literature pertaining to UMPs andcommodity prices, this paper pinpoints its possible innovation points. Secondly, itproceeds to illustrate the basic theories behind the policies and the prices. All above arefollowed by a quick overview of the practice taking by the Federal Reserve (Fed), Bankof England (BOE) and the European Central Bank (ECB) since January,2008, andthorough depiction of what has happened since then to the international commoditymarkets. And then, this paper exercises the empirical analysis with VAR models anddata from the US, UK and the Euro Area, which turns out to be the staple of the wholepaper. Each part of empirical analysis of a corresponding entity is conducted to twoapproaches, the real economy and the financial market, both of which are viewed aschannels transiting the UMPs to commodity prices. Finally, this paper suggests thatthere are some similarities and differences in regard to the effects each entity`sbalance-sheet-enlarging policies pose to the commodity prices and the way they do it.What`s more, with the increasingly striking trend of recovery, most of the policymakers consider an exit from the UMPs. In view of this, this paper manages to detectthe mode changes, by putting a dummy variable in the model, in the course of pricesbeing affected, caused by the announcement of QE exit strategy. Two main conclusionsare listed as follows:1. The UMPs characterized by enlarging central bank`s balance sheet bring downthe price of commodities in the short run, while there is no apparent evidence indicatingany long-term effects of such kind policies. 2. After the announcement of QE exit strategy being made, the positive effect ofthese policies on commodity prices seems enhanced.