The roundabout from interest rates to commodity prices in China: The role of money flow

This paper examines how money flow interacts with interest rates and commodity prices by using China's unique daily money-flow data and autoregressive distributed lag (ARDL) model. It is found that the money flow to the commodity financial market is driven negatively by interest rates. There was a roundabout transmission from international interest rates to market liquidity, then to price movement and then to money flow during the 2008 international financial crisis. Our analysis finds evidence that neither money flow nor market liquidity positively impact commodity prices, which does not support the popular belief that speculation drives up commodity price fluctuations. Holiday effects also positively influence money flow and commodity prices, while weekend effects positively influenced commodity prices only in the aftermath of the 2008 international financial crisis but negatively influenced international interest rates. •The roundabout from interest rate to commodity price via money flow is explored by using China's daily datasets of money flow to the commodity financial market for the first time.•A new perspective is introduced to examine speculation’s impact on price by analyzing whether money flow affects commodity prices in consideration that speculators must adjust money stocks to support their position change.•No evidence supports the popular belief that speculation drives up commodity price fluctuations since money flow and market liquidity has no positive impact on prices.