The impact of Chinas monetary policy on commodity prices

Abstract

This paper illuminates the impact of China's monetary policy on the world commodity

prices from August 2005 to December 2016, the period after exchange rate reform. Using

Structural VAR model with Cholesky decomposition, we find that Chinas interest rate

affects the commodity price significantly. A positive interest rate shock will cause the

world commodity price to decrease, but the effect is modest. The influence of the interest

rate shock is different across different commodities. Metal prices fluctuate greatly than

prices of agriculture raw material, food and beverage when facing an interest rate shock. In

the robustness check, we find that Chinas monetary policy has an influence on world

commodity prices via the import channel. A positive interest rate shock makes Chinas

demand for the foreign good decrease so that it leads to a fall in world commodity prices.