Critical Metals and Economic Uncertainty: Interrelated Dynamics Shaping the Energy Transition

Abstract

This study investigates how critical metals vital to the energy transition interact with key economic uncertainty indicators. Using a time-varying parameter vector autoregression (TVP-VAR) model, we analyse the dynamic relationships between five metals—aluminium, copper, nickel, cobalt, and lithium—and four market indicators: U.S. economic policy uncertainty (USEPU), option volatility (VIX), global freight (GFI), and commodity market volatility (Vol GSCI). Our findings reveal distinct transmission patterns. Cobalt acts as a primary net transmitter during moderate market conditions but shifts to a net receiver during extreme price movements. Aluminium and copper show limited overall influence, but they emerge as net transmitters during major price fluctuations. Nickel and lithium show diverse transmission patterns, with their influence particularly pronounced during price declines. Among uncertainty indicators, USEPU and VIX primarily serve as net receivers during market instability, while Vol GSCI consistently operates as a net transmitter, especially during periods of heightened commodity volatility.

Keywords: critical minerals, time varying spillover, uncertainty, Carbon Transition