Commodity prices and BRIC and G3 liquidity: A SFAVEC approach

•BRIC countries liquidity shocks are associated with increases in commodity prices.•G3 liquidity shocks are associated with smaller increases in commodity prices.•BRIC liquidity shocks are significantly connected with global tightening.•However, G3 liquidity shocks are not connected with global tigh...

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Bibliographic Details
Published in:Journal of banking & finance 2015-04, Vol.53, p.18-33
Main Authors: Ratti, Ronald A., Vespignani, Joaquin L.
Format: Article
Language:English
Subjects:
BRIC countries
Causality
Cointegration analysis
Commodities
Commodity prices
Eastern Europe
Economic models
Economic theory
Energy prices
Error correction models
Global liquidity
Latin America
Liquidity
SFAVEC
Structural change
Studies
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Summary:•BRIC countries liquidity shocks are associated with increases in commodity prices.•G3 liquidity shocks are associated with smaller increases in commodity prices.•BRIC liquidity shocks are significantly connected with global tightening.•However, G3 liquidity shocks are not connected with global tightening. This paper investigates the influence of liquidity in the major developed and major developing economies on commodity prices. Liquidity is taken to be M2. A novel finding is that unanticipated increases in the BRIC countries’ liquidity is associated with significant and persistent increases in commodity prices that are much larger than the effect of unanticipated increases in G3 liquidity, and the difference increases over time. Over 1999–2012 BRIC liquidity is strongly linked with global energy prices and global real activity whereas G3 liquidity is not. The impact of BRIC liquidity on mineral and metal prices is twice as large as that of G3 liquidity. Granger casualty goes from liquidity to commodity prices. BRIC and G3 liquidity and commodity prices are cointegrated. BRIC and G3 liquidity and global output and global prices are cointegrated. We construct a structural factor-augmented error correction (SFAVEC) model.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2014.12.013