Liquidity, monetary policy and the commodity futures market

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 24 January 2025

Staff Working Paper No. 1,114

By Miruna-Daniela Ivan, Chiara Banti and Neil Kellard

This paper explores a novel directional liquidity-based transmission channel of monetary policy, which explains the heterogeneity in the response of commodity future prices to monetary policy. Employing an event-study analysis with a high-frequency instrumental variable estimator, we find that the trading volume of our sample of commodity futures declines following FOMC announcements. Further, we find that more traded commodities are also more exposed to monetary policy surprises, suggesting a significant role for trading activity in the transmission of monetary policy shocks to commodity markets. Lastly, we show that the direction of the target rate change matters to this transmission mechanism of monetary policy.

Liquidity, monetary policy and the commodity futures market