Forging Prices: A Comparative Analysis of Chinese and United States Monetary Policy on Metal Markets

Abstract

I utilize an event study methodology to examine the effect of monetary policy shocks in the U.S. and China on base metals commodity prices from 1993 to 2022. I find that shocks to the Chinese 1-year policy rate, Chinese 5-year policy rate, Chinese reserve requirement, and U.S. Federal Funds Rate produce generally negative cumulative abnormal returns in copper, aluminum, zinc, and nickel prices. On a unit-by-unit basis, shocks to the Chinese reserve requirement produce the greatest negative cumulative abnormal returns for all metals, followed by the U.S. Federal Funds Rate, Chinese 1-year policy rate, and Chinese 5-year policy rate. Increases to Chinese monetary policy instruments produce a stronger magnitude of cumulative abnormal returns compared to decreases, with the exception of aluminum and zinc with the Chinese reserve requirement ratio. With U.S. monetary policy instruments, decreases produce a stronger magnitude of cumulative abnormal returns compared to increases in monetary policy instruments. However, standardization of cumulative abnormal returns based on historical volatility of changes to monetary policy shows the U.S. Federal Funds Rate as the most impactful monetary policy instrument. Results should ultimately be treated with skepticism due to poor goodness of fit of the model, suggesting that additional factors may be influencing base metal price movements; further research into this subject could explore other macroeconomic variables and transmission mechanisms that could better capture base metal commodity price dynamics.