CEPII, Recherche et Expertise sur l'economie mondiale
Interest Rate Dynamics and Commodity Prices

Christophe Gouel
Qingyin Ma
John Stachurski

 Highlights :
  • Interest rate movements are potentially a major contributor to commodity price fluctuations.
  • To study their influence, we introduce time-varying interest rates into a competitive storage model, analyze the resulting model from a theoretical and quantitative perspective, and show under what conditions interest rates are negatively correlated with commodity prices.
  • In a quantitative analysis, we focus on the speculative channel and show that, through this channel, real interest rates have a non-trivial and persistent negative impact on commodity prices.

 Abstract :
In economic studies and popular media, interest rates are routinely cited as a major factor behind commodity price fluctuations. At the same time, the channels of transmission are far from transparent, leading to long-running debates on the sign and magnitude of interest rate effects. Purely empirical studies struggle to address these issues because of the complex interactions between interest rates, prices, supply changes and aggregate demand. To move this debate to a solid footing, we extend the competitive storage model to include stochastically evolving interest rates. We establish general conditions for existence and uniqueness of solutions, as well as providing a systematic theoretical and quantitative analysis of the interactions between interest rates and prices.

 Keywords : Commodity Prices | Time-varying Interest Rate | Competitive Storage

 JEL : C62, C63, E43, E52, G12
CEPII Working Paper
N°2023-21, October 2023

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 Fields of expertise

Money & Finance