Long-run prices of primary commodities and oil prices

Abstract

Acutely volatile movements in primary commodity prices have drawn considerable interest from empirical researchers. Exports of these commodities account for the bulk of export earnings of developing countries. The traditional demand-based framework was unable to explain the marked deterioration in these prices during the 1980s. This paper tries to ascertain the role played by real oil prices in explaining the extremely volatile movements in real prices of primary commodities by taking into account oil price shocks over the period 1973–1996, using monthly data. Real primary commodity prices and real oil prices are cointegrated. Additionally, the error in the cointegrating relation stimulates real commodity price adjustment, not real oil price adjustment.