Global liquidity and commodity prices uncertainty using SFAVEC model

Abstract

This paper examines the impact of global liquidity on global commodity prices and asset prices in some major developing and developed economies. Specifically, the global liquidity on global commodity prices and asset prices is investigated using data from six major developing and emerging economies; Brazil, Russia, India, China, South Africa and Mexico (BRICSM) and four major developed economies; Canada, the European Union (EU), Japan and the US (G4) over the period 1999:01 to 2019:12. Chakraborty and Bordoloi (2019) report that global liquidity positively impacts commodity prices over time. A structural factor-augmented vector error correction model which allows for a partition among short-run and long-run is estimated. Again a robust evidence of global liquidity leads to significant and persistent upsurges in global commodity prices and global asset prices. The key finding is the positive innovations in BRICSM M2 that are linked with a positive effect on the commodity prices that is more than the impact of unexpected increases in G4 M2 on commodity prices. The commodity price uncertainty is attributed to commodity price volatility in developed and developing countries, with the uncertainty effect being more significant and persistent in emerging economies.

Keywords

• Global liquidity, commodity prices uncertainty
• BRICSM M2 economies
• G4 M2 economies
• Johansen cointegration test
• SFAVEC model financial econo