Monetary policy shocks and real commodity prices

In this paper we document the effects of monetary policy shocks on real commodity prices. Based on a VAR estimated using long-run restrictions, an expansionary monetary policy shock causes real commodity prices and output both to rise sharply for a short period of time. We find that a simple dynamic equilibrium model of commodity supply and demand can give a realistic response of real commodity prices to monetary policy shocks, for a wide range of parameter values. Furthermore, we find that based on historical simulations, shocks to monetary policy played an important role in commodity price fluctuations during the Great Recession, but they have contributed negligibly to commodity price movements overall since 1970. Even though monetary policy shocks have a robust and large marginal effect on real commodity prices, most monetary policy shocks are small, and most fluctuations in real commodity prices are correspondingly small.