Commodity Prices and BRIC and G3 Liquidity: A SFAVEC Approach

This paper investigates the influence of liquidity in the major developed and major developing ‎economies on commodity prices. Unanticipated increases in the BRIC countries’ liquidity is ‎associated with significant and persistent increases in commodity prices that are much larger ‎than the effect of unanticipated increases in G3 liquidity, and the difference increases over ‎time. Over 1999-2012 BRIC liquidity is strongly linked with global energy prices and global ‎real activity whereas G3 liquidity is not. The impact of BRIC liquidity on mineral and metal ‎prices is twice as large as that of G3 liquidity. BRIC liquidity is significantly connected with ‎global tightening while G3 liquidity is not. Granger casualty goes from liquidity to ‎commodity prices. BRIC and G3 liquidity and commodity prices are cointegrated. BRIC and ‎G3 liquidity and global output and global prices are cointegrated. We constructed a structural ‎factor-augmented error correction (SFAVEC) model.‎