Commodity Price Responses to Monetary Policy Surprises

Commodity prices are important both as a source of shocks and for the propagation of shocks originating elsewhere in the economy. Many vector autoregression (VAR) studies estimate a gradual response of commodity prices to monetary policy shocks. Exploiting information in high-frequency financial market data, and using the methods of Rigobon and Sack (2004) I find that a 10 basis point surprise change in interest rates causes commodity prices to fall immediately by about 0.5%. This is about two-thirds of the estimated response of the S&P500, and about five times larger than the response in a VAR 12 months after the shock. Metals prices tend to respond more than agricultural commodities. The point estimate for oil prices is similar to other commodities, but is estimated imprecisely. ∗Contact: Dean Scrimgeour, Economics Department, Colgate University, 13 Oak Drive, Hamilton, NY 13346. Email: [email protected]. This work has benefited from comments from Emily Conover, Ed Gamber, Chad Jones, Yuriy Gorodnichenko, Roisin O’Sullivan, Ann Owen, Christina Romer, David Romer, Nicole Simpson, Julie Smith, Chad Sparber, and Marc Tomljanovich. Thanks also to RC Research for providing futures data.