Excess Liquidity and Commodity Boom

This paper presents an investigation of whether excess liquidity has been serving as a driving force for the increase in international commodity prices. This study uses a structural VAR model including two global liquidity indicators and the world production index to examine the determinants of international commodity prices. The lending of tolerant international bankers promoted commodity price might increase before the global financial crisis while the international liquidity squeeze brought about their decline after the Lehman Shock. Among commodities, the prices of industrial metals are more attributable to funding liquidity, and the price of crude oil, with a market believed to be more vulnerable to speculative money inflows, has been less dependent on liquidity. Gold is exceptional. It acted as a safe haven during the period of international financial dysfunction.