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Commodity Prices and Interest Rates: the Euro Zone

Bäckman, Tora LU (2011) NEKM01 20111
Department of Economics
Abstract
Commodity prices rose jointly to record levels during the past decade and it has been argued that this development is due to macroeconomic factors. Frankel has presented a theory which explains commodity prices to be negatively correlated to real interest rates. This paper empirically investigates if the real interest rate negatively affects commodity prices and if they exhibit overshooting characteristics, using the Euro real interest rate as a proxy for world interest rate. This is analysed by means of a VAR model, by which the output is used to specify impulse responses and variance decompositions. The obtained result is that the Euro real interest rate negatively affects commodity prices over the medium run. Moreover, the effect on... (More)
Commodity prices rose jointly to record levels during the past decade and it has been argued that this development is due to macroeconomic factors. Frankel has presented a theory which explains commodity prices to be negatively correlated to real interest rates. This paper empirically investigates if the real interest rate negatively affects commodity prices and if they exhibit overshooting characteristics, using the Euro real interest rate as a proxy for world interest rate. This is analysed by means of a VAR model, by which the output is used to specify impulse responses and variance decompositions. The obtained result is that the Euro real interest rate negatively affects commodity prices over the medium run. Moreover, the effect on commodity prices of a Euro real interest rate change is bigger than the like of the United States. Therefore the ECB must take into account the endogeneity of commodity prices when performing an effective monetary policy with the aim of keeping inflation level stable. (Less)
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author
Bäckman, Tora LU
supervisor
organization
course
NEKM01 20111
year
type
H1 - Master's Degree (One Year)
subject
keywords
Commodity price, Interest rate, Monetary policy, VAR, Euro
language
English
id
1975852
date added to LUP
2011-06-16 14:56:04
date last changed
2011-06-16 14:56:04
@misc{1975852,
  abstract     = {Commodity prices rose jointly to record levels during the past decade and it has been argued that this development is due to macroeconomic factors. Frankel has presented a theory which explains commodity prices to be negatively correlated to real interest rates. This paper empirically investigates if the real interest rate negatively affects commodity prices and if they exhibit overshooting characteristics, using the Euro real interest rate as a proxy for world interest rate. This is analysed by means of a VAR model, by which the output is used to specify impulse responses and variance decompositions. The obtained result is that the Euro real interest rate negatively affects commodity prices over the medium run. Moreover, the effect on commodity prices of a Euro real interest rate change is bigger than the like of the United States. Therefore the ECB must take into account the endogeneity of commodity prices when performing an effective monetary policy with the aim of keeping inflation level stable.},
  author       = {Bäckman, Tora},
  keyword      = {Commodity price,Interest rate,Monetary policy,VAR,Euro},
  language     = {eng},
  note         = {Student Paper},
  title        = {Commodity Prices and Interest Rates: the Euro Zone},
  year         = {2011},
}