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.