How the Financial Market Can Dampen the Effects of Commodity Price Shocks

42 Pages Posted: 8 Oct 2018

See all articles by Myunghyun Kim

Myunghyun Kim

The Bank of Korea; The Bank of Korea-Economic Research Institute

Date Written: September 28, 2018

Abstract

Commodities have begun to function as an asset class during the past decade, as trading in commodity derivatives has increased massively since the 2000s. This paper studies the role of commodities as an asset class in accounting for the recently lessened impacts of commodity price shocks on the economy, by constructing a model with financial frictions and with financial intermediaries that own two assets – tied to commodities as well as to capital. Simulation results of the model show that financial intermediaries’ holdings of commodities as assets have contributed to the recent reduction in the effects of commodity price shocks.

Keywords: Commodity price shocks, Commodity derivatives

JEL Classification: E30, E44, Q43

Suggested Citation

Kim, Myunghyun, How the Financial Market Can Dampen the Effects of Commodity Price Shocks (September 28, 2018). Bank of Korea WP 2018-28. Available at SSRN: https://ssrn.com/abstract=3256554 or http://dx.doi.org/10.2139/ssrn.3256554

Myunghyun Kim (Contact Author)

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

The Bank of Korea-Economic Research Institute ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

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