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.