Commodity price shocks: Order within chaos?

Abstract

The prices of 27 internationally traded commodities are decomposed into transitory and permanent components by applying an ideal band-pass filter to monthly data during 1970–2022. The two components account roughly equally to price variations, but with wide heterogeneity. The permanent component accounts for two-thirds of the variability in agricultural prices but less than 30 percent in energy prices. The transitory component revealed three medium-term cycles. The first (from the early 1970s to the mid-1980s) and third (from the early 2000s to 2020) exhibit similar duration and involve almost all commodities, while the second (spanning the 1990s) is mostly applicable to metals, with the notable absence of energy. The permanent component differs across commodities, with an upward trend for most industrial commodities and downward trend for agriculture. Moreover, the permanent component of commodities in which investment is irreversible (including energy, metals, and tree crops) exhibits a high degree of nonlinearity, most likely reflecting less flexibility in investment allocation and input use of these commodities. Prices of commodities subjected to widespread policy interventions, such as internationally-coordinated supply management schemes, exhibit persistent deviations from linear trends.