Real Commodity Prices Research Articles

Breaks, trends and unit roots in commodity prices: a robust investigation

AbstractThis paper empirically examines the time series behavior of primary commodity prices relative to manufactures with reference to the nature of their underlying trends and the persistence of shocks driving the price processes. The direction and magnitude of the trends are assessed employing a set of econometric techniques that is robust to the nature of persistence in the commodity price shocks, thereby obviating the need for unit root pretesting. Specifically, the methods allow consistent estimation of the number and location of structural breaks in the trend function as well as facilitate the distinction between trend breaks and pure level shifts. Further, a new set of powerful unit root tests is applied to determine whether the underlying commodity price series can be characterized as difference or trend stationary processes. These tests treat breaks under the unit root null and the trend stationary alternative in a symmetric fashion thereby alleviating the procedures from spurious rejection problems and low power issues that plague most existing procedures. Relative to the extant literature, we find more evidence in favor of trend stationarity suggesting that real commodity price shocks are primarily of a transitory nature. We conclude with a discussion of the policy implications of our results.

Super Cycles of Commodity Prices Since the Mid-Nineteenth Century

Decomposition of real commodity prices suggests four super cycles during 1865–2010 ranging between 30 and 40 years with amplitudes 20–40% higher or lower than the long-run trend. Non-oil price super-cycles follow world GDP, indicating they are essentially demand-determined; causality runs in the opposite direction for oil prices. The mean of each super-cycle of non-oil commodities is generally lower than for the previous cycle, supporting the Prebisch–Singer hypothesis. Tropical agriculture experienced the strongest and steepest long-term downward trend through the twentieth century, followed by non-tropical agriculture and metals, while real oil prices experienced a long-term upward trend, interrupted temporarily during the twentieth century.

Monetary policy shocks and real commodity prices

In this paper we document the effects of monetary policy shocks on real commodity prices. Based on a VAR estimated using long-run restrictions, an expansionary monetary policy shock causes real commodity prices and output both to rise sharply for a short period of time. We find that a simple dynamic equilibrium model of commodity supply and demand can give a realistic response of real commodity prices to monetary policy shocks, for a wide range of parameter values. Furthermore, we find that based on historical simulations, shocks to monetary policy played an important role in commodity price fluctuations during the Great Recession, but they have contributed negligibly to commodity price movements overall since 1970. Even though monetary policy shocks have a robust and large marginal effect on real commodity prices, most monetary policy shocks are small, and most fluctuations in real commodity prices are correspondingly small.

A Long-Run Relationship between Real Exchange Rates and Real Commodity Prices: The Case of Mongolia

In Mongolia, the mining sector has been upgraded and developed very sharply last few years and some international experts stated that this growth will be hold up related to the strategic deposits such as Oyu tolgoi, Tavan tolgoi. It shows that Mongolia will become more relative to the foreign economy in the further. So, this paper tries to examine whether the real exchange rate and the real price of commodity exports move together over time in case of Mongolia. In this paper, we used the Engle and Granger (1987) co-integration approach to assess the long-run relationships between two variables and according to empirical results, the increase in price of Mongolian commodity exports appreciates the domestic real exchange rate. Also, the average half-life of adjustment of real exchange rates to commodity price is found to be about six months.

Trends in real commodity prices: How real is real?

Testing for the existence of downward trends in real commodity prices has been the focus of several studies since the Prebisch–Singer hypothesis was formulated back in 1950. In this article, we focus on annual and monthly series of various commodity categories and consider alternative price deflators. Based on the methodology of Harvey et al. (2010), which is robust to the order of integration of the time series, we conclude that the time frequency and the price deflators play a key role when testing for the Prebisch–Singer hypothesis. For instance, at an annual frequency (1900–2003, 1900–2008), it becomes considerably more likely to support it when deflating by the unadjusted US CPI-all items than when deflating by the Manufactures Unit Value (MUV) Index or the Historical Price Index of Manufactures (HPIM). This finding is in agreement with the Svedberg and Tilton (2006) discussion on the CPI's overestimation of inflation and the measurement of the real price of copper. When dealing with monthly data (January 1957–December 2010), our results show that real prices tend not to reject the null hypothesis of a trendless series, except when deflating by the PPI-Crude Materials and, to a lesser extent, by the HPIM.We also explore the issue of using different currencies. Our estimation results, conducted for the US dollar and the Pound Sterling with annual data (1800–2005; 1900–2003), show that the Prebisch–Singer hypothesis receives more support when using prices expressed in pounds and deflated by the UK CPI.

Nominal and Real Exchange Rate Models in South Africa: How Robust are They?

This paper addresses difficulties in modelling exchange rates in South Africa. Real exchange rate models of earlier research seem to be sensitive to the sample period considered, alternative variable definition, data frequency and estimation methods. Alternative exchange rate models proposed in this paper including the stock-flow approach and variants of the monetary model are not fully robust to data frequency and alternative estimation periods, either. Nevertheless, adding openness to the stock-flow approach and augmenting the monetary model with share prices and the country risk premium improves significantly the fit of the models around the large (nominal and real) depreciation episodes of 2002 and 2008. Interestingly, real commodity prices do not help explain the large depreciations. While these models do a reasonably good job in-sample, their out-of-sample forecasting properties remain poor.

Commodity Prices: How Important are Real and Nominal Shocks?

We consider the response of both nominal and real commodity prices on world markets to real and nominal shocks by hypothesizing that nominal shocks can permanently affect nominal commodity prices, but can have only temporary effect on real commodity prices. Real shocks, in contrast, can have permanent as well as temporary effects on both nominal and real commodity prices. When nominal and real shocks are decomposed in this manner, real shocks are found to be of much greater importance to the observed movements in commodity prices. Further, when the shocks are related to the rate of growth of world industrial production as an indicator of business cycle movements, the results suggest that the impact of the business cycle is self-stabilizing in that there is an initial positive effect on growth in commodity prices followed by a fully offsetting negative effect.

Commodity prices: how important are real and nominal shocks?

We consider the response of both nominal and real commodity prices on world markets to real and nominal shocks by hypothesizing that nominal shocks can permanently affect nominal commodity prices, but can have only temporary effects on real commodity prices. Real shocks, in contrast, can have permanent as well as temporary effects on both nominal and real commodity prices. When nominal and real shocks are decomposed in this manner, real shocks are found to be of much greater importance to the observed movements in commodity prices. We use the Blanchard and Quah (BQ, 1989) decomposition to obtain the permanent and temporary components of the real commodity price series and relate this to the rate of growth of world industrial production as an indicator of business cycle movements. The results suggest that the impact of the business cycle is self-stabilizing in that there is an initial positive effect on growth in commodity prices followed by a fully offsetting negative effect.

Long-term trends in the Real real prices of primary commodities: Inflation bias and the Prebisch–Singer hypothesis

In his recent article on measuring the long-term trends in the real prices of primary commodities, Cuddington (2010) extends in several important respects our earlier efforts ( Svedberg and Tilton, 2006) to correct real commodity price trends for biases in the Consumer Price Index and other deflators. First, he argues for a log–linear relationship between prices and time. Second, he proposes a simple and quick method for obtaining corrected price trends from the published but uncorrected estimates. Finally, he illustrates, for the case of copper and presumably for many other commodities as well, the difficulties of obtaining real price trends significantly different from zero when the log values of the price data contain a unit root, requiring the use of difference stationary models. We welcome these insights, which should improve and make easier efforts to estimate correctly real commodity price trends over the long run. We would stress, however, that it is still important to correct for the biases in inflation indices, notwithstanding the failure of difference stationary models to obtain long-run real price trends (both corrected and uncorrected) significantly different from zero.

The terms of trade for commodities since the mid-19thcentury

AbstractThis paper shows that there was an improvement in the barter terms of trade for non-fuel commodities vs. manufactures in the late 19thand early 20thcenturies, followed by significant deterioration over the rest of the 20thcentury. However, the decline over most of the 20thcentury was neither continuous nor was it distributed evenly among different commodity groups. The far-reaching changes that the world economy underwent around 1920 and again around 1979 led to a stepwise deterioration which, over the long term, was reflected in roughly a halving of real commodity prices. Tropical agriculture fared the worst, whereas minerals had the best performance, with non-tropical agriculture in an intermediate situation. The increase experienced in the first decade of the 21stcentury may be the beginning of a long-term upward trend, but it is too soon to tell.

El Nino and World Primary Commodity Prices: Warm Water or Hot Air?

This paper examines the historical effects of the El Nino-Southern Oscillation (ENSO) cycle on world prices and economic activity. The primary focus is on world real non-oil primary commodity prices, although the effects on G-7 consumer price inflation and GDP growth are also considered. This paper has several distinct advantages over previous studies. First, several econometric models are estimated using fairly broad measures of prices and economic activity. Second, the models include continuous measures of ENSO intensity (sea surface temperature and sea-level air pressure anomalies in the Pacific Ocean) rather than dummy variable measures. Finally, confidence intervals are constructed for all estimated effects of ENSO on world prices and economic activity. The analysis indicates that ENSO has economically important and statistically significant effects on world real commodity prices. A one-standard-deviation positive surprise in ENSO, for example, raises real commodity price inflation about 3.5 to 4 per...

Cointegration analysis with structural breaks and deterministic trends: an application to the Canadian dollar

This article applies recent developments in cointegration analysis with structural breaks and deterministic trends to analyse the relationship between the real Canada–US exchange rate and commodity prices. Previous empirical studies disagree on whether these variables are cointegrated. The root of disagreement could be in the handling of deterministic trends and potential structural breaks. I find that even after controlling for these matters, the question of whether the real exchange rate and commodity prices are cointegrated for Canada remains unresolved.

Participation of African member states in the World Trade Organisation (WTO) multilateral trading system

The core purpose and goals of the World Trade Organisation (WTO) are to enhance growth by allowing each country to trade freely according to its comparative advantage. The other stated main objectives of the WTO are: raising standards of living; providing full employment; reduction of tariffs and non‐tariff barriers; and the elimination of discriminatory treatment. According to the current orthodox economic view, trade openness is essential for growth: countries that liberalise their imports and orientate production towards exports are assumed to have faster growth than those that do not, and the faster the rate of opening, the greater will the prospect be for development. The emphasis on trade liberalisation and export orientation in the past ten years following the adoption of the Uruguay Round has led to phenomenal growth in world merchandise trade, which has grown consistently faster than output. The orthodox view approach is today expanded and modified with the view that liberalisation measures are not sufficient by themselves and should be accompanied by other factors such as sound macroeconomic policies, good governance and a modern infrastructure. Africa's dependence on primary commodities as a source of export earnings has meant that it is vulnerable to weather conditions, market vagaries, and price volatility, arising mainly from supply shock and the secular decline in real commodity prices. The attendant terms of trade losses have exacted heavy costs in terms of incomes, indebtedness, investment, poverty and development. Therefore, the basic approach that liberalisation has a direct link to economic growth and should be undertaken as fast as possible is being questioned and has been challenged by empirical studies in recent years. The relevant studies have shown that there is a lack of relationship between the degree of trade liberalisation and the rate of growth. The emerging paradigm accepts that there are possible costs, as well as potential benefits of trade liberalisation to a particular developing country, depending on the conditions in that country, and the type of liberalisation undertaken. The other impediments and weaknesses identified as affecting effective, efficient and economical participation of African members in the WTO include rapid liberalisation as potential source of fiscal instability; general absence of peace, security and democracy; globalisation and lack of competitive ability; supply‐side constraints; high export concentration ratio; problems of implementation; exclusion and/or marginalisation from knowledge‐based economy; and lack of capacity. The Doha Development Round was initiated to attend to, and address, these problems, and it is still too early to predict the outcome. African countries need to look for African solutions to their socio‐economic and political problems, adopting transdisciplinary approaches in the context of the African Renaissance paradigm.

Availability of Bauxite Reserves

Based upon a large database, this paper analyzes the record of bauxite mine production, exploration success, and resource depletion and evaluates the availability of bauxite reserves in the near future. The record clearly shows that for the past 50 years world bauxite production rose by an annual increase of over 5% while per capita consumption rose during the same period by about 4%. Time trends of the world bauxite reserve life index (RLI); that is, known world reserves of a given year divided by world production of the same year, are episodic and seem to follow bauxite price cycles. The present-day RLI indicates adequate bauxite supply for about 180 years and is the same as it was in 1950. However, if an annual growth rate of 5% is considered, the currently known reserves will be exhausted within the next 20 years and the reserve base will be adequate for not more than 25 years. This scenario is based, of course, on the unrealistic assumption that future exploration efforts fail to discover additional reserves. Evaluation of the quality, in terms of bauxite signatures, and quantity of presently known bauxite prospects that may be mined in future suggests that there is sufficient potential for adequate bauxite supply for the next 20 to 25 years at least. Bauxite signatures cover a wide range of values that allows selection of the most favorable bauxite prospects for future mining, both in economic as well as environmental terms. Although, there is the general believe that the world abundance of bauxite resources will ensure sufficient supply to meet future demands significant additional reserves have to be discovered if exponential growth rates continue. As the question of future bauxite supply is subject to economic and geologic principles one has to take into consideration that increasing exploration maturity in many mineral provinces will make it difficult to locate additional bauxite reserves and that decreasing real commodity prices will influence the level of investment in bauxite exploration.

Commodity currencies and the real exchange rate

This paper examines whether the real exchange rates of commodity-exporting countries and the real prices of their commodity exports move together over time. Using International Monetary Fund (IMF) data on the world prices of 44 commodities and national commodity export shares, we construct new monthly indices of national commodity export prices for 58 commodity-exporting countries over 1980–2002. Evidence of a long-run relationship between national real exchange rate and real commodity prices is found for about one-third of the commodity-exporting countries. The long-run real exchange rate of these ‘commodity currencies’ is not constant (as would be implied by purchasing power parity-based models) but is time varying, being dependent on movements in the real price of commodity exports.

Estimation of the Equilibrium Real Exchange Rate for South Africa

Based on the Johansen cointegration estimation methodology, much of the long-run behavior of the real effective exchange rate of South Africa can be explained by real interest rate differentials, GDP per capita (both relative to trading partners), real commodity prices, trade openness, the fiscal balance, and the extent of net foreign assets. On the basis of these fundamentals, the real exchange rate in early 2002 was found to be significantly more depreciated with respect to the estimated equilibrium level. The half-life of the deviation of the real exchange rate from the estimated equilibrium one was found to be somewhat more than two years.

Estimation of the Equilibrium Real Exchange Rate for South Africa

Based on the Johansen cointegration estimation methodology, much of the long-run behavior of the real effective exchange rate of South Africa can be explained by real interest rate differentials, GDP per capita (both relative to trading partners), real commodity prices, trade openness, the fiscal balance, and the extent of net foreign assets. On the basis of these fundamentals, the real exchange rate in early 2002 was found to be significantly more depreciated with respect to the estimated equilibrium level. The half-life of the deviation of the real exchange rate from the estimated equilibrium one was found to be somewhat more than two years.

El Niño and World Primary Commodity Prices: Warm Water or Hot Air?

This paper examines the historical effects of the El Niño-Southern Oscillation (ENSO) cycle on world prices and economic activity. The primary focus is on world real non-oil primary commodity prices, although the effects on G-7 consumer price inflation and GDP growth are also considered. This paper has several distinct advantages over previous studies. First, several econometric models are estimated using fairly broad measures of prices and economic activity. Second, the models include continuous measures of ENSO intensity (sea surface temperature and sea-level air pressure anomalies in the Pacific Ocean) rather than dummy variable measures. Finally, confidence intervals are constructed for all estimated effects of ENSO on world prices and economic activity. The analysis indicates that ENSO has economically important and statistically significant effects on world real commodity prices. A one-standard-deviation positive surprise in ENSO, for example, raises real commodity price inflation about 3.5 to 4 percentage points. Moreover, ENSO appears to account for almost 20% of commodity price inflation movements over the past several years. ENSO also has some explanatory power for world consumer price inflation and world economic activity, accounting for approximately 10% to 20% of movements in those variables.

The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability

Using the longest dataset publicly available (The Economist's index of industrial commodity prices), we analyze the behavior of real commodity prices over the period 1862-99, and have two main findings. First, while there has been a downward trend in real commodity prices of 13 percent per year over the last 140 years, little support is found for a break in the long-run trend decline in commodity prices. Second, there is evidence of a ratcheting up in the variability of price movements. The amplitude of price movements increased in the early 1900s, while the frequency of large price movements increased after the collapse of the Bretton Woods regime of fixed exchange rates in the early 1970s. While there is a downward trend in real commodity prices, this is of little practical policy relevance as it is small and completely dominated by the variability of prices.

Keynes, Cocoa, and Copper: In Search of Commodity Currencies

This paper examines whether the real exchange rates of commodity-exporting countries and the real prices of their commodity exports move together over time. Using IMF data on the world prices of 44 commodities and national commodity export shares, we construct new monthly indices of national commodity export prices for 58 countries over 1980-2002. A long-run relationship between real exchange rates and real commodity prices is found for about two-fifths of the commodity-exporting countries. Also, the behavior of the real exchange rate of commodity currencies is found to be independent of the nominal exchange rate regime. The average half-life of adjustment of real exchange rates to commodity-price-augmented purchasing power parity is found to be about eight months, which is much shorter than Rogoff’s (1996) consensus estimate of three to five years, and provides an important missing piece of the PPP puzzle.