Global commodity prices, Economic Activity and Monetary Policy: The Relevance of China

Abstract

After decades of strong economic growth, industrialization and rising living standards, China has become a dominant player in commodity markets. This study attempts to shed light on the role of China in global commodity price dynamics.The empirical analysis applies (Toda and Yamamoto, 1995, J Econom, 66, 225–250) type Granger causality tests and Generalized Impulse Response Functions (GIRF) to examine causal linkages and short-run dynamics between global commodity prices, economic activity, and monetary policy of China from 1998 to 2012.Our results provide evidence that economic activity is Granger causing both energy and industrial metals prices. As for the GIRF analysis, our findings suggest that energy and industrial metals prices respond positively to an increase in the economic activity and that agricultural as well as energy commodity prices overshoot after a drop in the real interest rate of China. We further find evidence that industrial metals prices tend to be higher when China׳s exchange rate system is relaxed.