Essays in Liquidity, Monetary Policy and the Commodity Market

This thesis presents three studies related to liquidity, monetary policy, and the commodity market. The first paper is an empirical study of the effect of the 2016 US Prime Money Market Funds (PMMFs) regulation on the crude oil market. This reform increased short-term dollar borrowing costs and due to its debt expansion, the oil sector became particularly susceptible to disruptions in the global funding market. Building on the global crude oil market SVAR model of Kilian and Murphy (2014), we find that tighter PMMFs funding conditions have a negative effect on the real price of crude oil and a positive effect on oil production, driven primarily by a fall in certificates of deposits issued by global banks. The second paper provides an empirical investigation into a novel directional liquidity-based transmission channel to explain the heterogeneity in the response of commodity futures prices to changes in the monetary policy stance. Using an event-study analysis with a high-frequency instrumental variable estimator, we find a reduction in trading activity following surprise increases in the policy rate. Further, we find that more traded commodities are also more exposed to monetary policy surprises, suggesting a significant role for trading activity in the transmission of monetary policy shocks to commodity markets. Finally, the third paper explores the international bank-lending transmission channel of unconventional monetary policy to the Brent crude oil futures market. Employing a hybrid model, combining the traditional VAR framework with a policy surprise high-frequency identification approach, we document that perceived expansionary monetary policies reduce the trading volume and the returns of Brent futures via international bank local claims on emerging Asia. Further, perceived contractionary policies also reduce trading activity in Brent futures market, while evading the proposed international bank-lending channel.