Often easy answers to are not forthcoming in economics. We just posted a story on the relationship between the Taylor rule and commodity prices which stated that the low real rates may have been responsible for the surge in prices. Now a study from the Federal Reserve of San Francisco suggests that the large asset purchase program QE and QE2 did not have an impact on commodity prices.
The authors used novel approach to look at this problem which has often been used finance stock studies. An event analysis looks at the reaction of asset prices around announcements concerning large asset purchases. The story is very simple. If the large asset purchase programs will supply excess liquidity that will be used to buy commodities, there should be a price reaction when the new programs are announced. In the currencies, the dollar should be sold and commodities should be bid higher. Rates should decline. While rates behaved as expected, other asset classes did not see the expected price reaction on the announcement date.
The sample size is limited, but the number suggest that the asset price reaction is a little more complex than initially expected. First, if there is strong uncertainty on the announcement date, there could be a general sell-off of risky assets. Second, the effect of purchase programs may not have an immediate impact on liquidity. As noted by the authors, it could signal that the economy is in worse shape than expected; consequently an asset sell-off. The change in inflation expectations may not be measured in a single day's return.
The authors used novel approach to look at this problem which has often been used finance stock studies. An event analysis looks at the reaction of asset prices around announcements concerning large asset purchases. The story is very simple. If the large asset purchase programs will supply excess liquidity that will be used to buy commodities, there should be a price reaction when the new programs are announced. In the currencies, the dollar should be sold and commodities should be bid higher. Rates should decline. While rates behaved as expected, other asset classes did not see the expected price reaction on the announcement date.
The sample size is limited, but the number suggest that the asset price reaction is a little more complex than initially expected. First, if there is strong uncertainty on the announcement date, there could be a general sell-off of risky assets. Second, the effect of purchase programs may not have an immediate impact on liquidity. As noted by the authors, it could signal that the economy is in worse shape than expected; consequently an asset sell-off. The change in inflation expectations may not be measured in a single day's return.
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