Feedback effects of commodity futures prices

Author / Creator

Sockin, Michael

Available as

Online

Summary

A widely held view posits that when speculators drive up the futures price of a commodity, real demand must fall. This paper develops a model to contrast this view through an informational feedback...

A widely held view posits that when speculators drive up the futures price of a commodity, real demand must fall. This paper develops a model to contrast this view through an informational feedback effect. Our model builds on two practical observations: 1) Futures prices of key industrial commodities such as copper and oil became barometers of global demand in the recent decade as a result of the rapid economic expansions of emerging economies; and 2) complementarity exists in industrial producers' production decisions as a result of their need to trade produced goods. In the presence of information frictions and production complementarity, an increase in commodity futures prices, even if driven by non-fundamental factors, signals strong global economic strength, and may thus induce increased commodity demand.

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