Most of my writings on this blog relate to financialization of commodity markets. Specifically, I describe how financial traders now dominate the commodity futures markets and their decisions have the greatest impact on prices. I recently published a paper that ties these ideas to monetary policy and inflation.
I argue that financialization created a more direct influence on commodity prices through an "expectations channel." As a case study, I describe the impact QE2 had on commodity prices and measured inflation via this mechanism. As the FED cranked up QE2, inflationary expectations led investors to bet on oil and other commodities, creating a temporary bubble that popped dramatically the first week of May 2011. However, since the process was driven by investors who may (or may not) learn from their mistakes, it may have been a one-time occurrence.
The paper was published in the International Journal of Political Economy, HERE.
