World Non-Oil Primary Commodity Markets: Comment on Chu and Morrison

Abstract

A NTICIPATING FLUCTUATIONS in commodity prices must be of paramount concern when multilateral financial institutions such as the Fund establish programs and the conditions for them. Although some of these arrangements may provide short-term assistance to members experiencing temporary balance of payments difficulties, those nations whose primary exports are subject to a high degree of price variability require special consideration. To this end, many authors have attempted to explain the temporal behavior of commodity prices (Chu and Morrison (1986) and the references therein). Chu and Morrison have provided a structural model to identify what may be loosely termed the "microeconomic factors" behind fluctuations in commodity prices. In this note I illustrate that nonstationary commodity prices may be the result of an optimal monetary policy; in particular, that commodity prices will be stationary only if the nominal money stock exhibits similar behavior. This result may be of use in the empirical modeling of commodity prices, as well as in setting conditions for access to some forms of multilateral assistance.