The impact of monetary liquidity on Chinese aluminum prices

By expanding Frankel and Rose's (2009) theoretical model to consider the interaction of commodity prices with both money liquidity and expectation formation, this paper empirically studies the long-run relationship and short-term dynamics between aluminum prices and money liquidity via Vector autoregressive (VAR) and Impulse Response Function methodologies. Our results show that: (1) a cointegration relationship between money liquidity and Chinese aluminum prices exists, and monetary liquidity positively significantly influences the price over long periods; (2) a structural change has been found during the 2008 Financial Crisis and the change of Chinese monetary policies; and (3) the negative impact of production capacity mechanism on aluminum prices coexists with the positive impact of financial asset returns mechanism, to allow for varied market expectations on aluminum prices within and outside China.