SHORT AND LONG-TERM CAUSALITY RELATIONS BETWEEN BROAD MONEY AND CRUDE OIL, EXCHANGE RATE, COMMODITY OPTION VOLATILITIES

Abstract

Purpose- The purpose of the study is to examine the dynamics linking broad money (M3) growth and crude oil volatility, euro/dollar volatility, commodity option volatility for the case of the US.

Methodology- Causality analysis depending on Vector Error Correction (VEC) models is employed to estimate the relationship between broad money (M3) growth and crude oil volatility, euro/dollar volatility, commodity option volatility for the case of the US.

Findings- Causality analysis results stresses that the balance sheet size of FED increase the uncertainties commodity and currency markets and thus volatility in euro/dollar and spot oil price and commodity options can be raised in the long-term. Both instantaneous causality and Granger causality indicate that money demand behavior of US economic agents are not affected from the commodity option, euro/dollar and crude oil volatilities both in short- and long-run.  

Conclusion- Our empirical analysis implies that monetary aggregate targeting policy of FED can not be negatively mitigated by commodity option volatility, euro/dollar volatility, crude oil volatility indices. For further studies and analysis, we suggest the clarification of channels between monetary policy stance and financial instruments traded in commodity and currency markets. 

Keywords

• Causality analysis
• crude oil volatility
• exchange rate volatility
• commodity option volatility
• monetary policy

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