Commodity price uncertainty comovement: Does it matter for global economic growth?

Global economic activity is surrounded by increasing uncertainties from various sources. In this paper, we focus on commodity prices and estimate a global commodity uncertainty factor by capturing comovement in volatilities of major agricultural, metals and energy commodity markets through a group-specific Dynamic Factor Model. Then, by computing impulse response functions estimated using a small-scale Structural VAR model, we find that an increase in the common commodity price uncertainty results in a substantial and persistent drop in investment and trade, for a set of emerging and advanced economies. We also show that a global commodity uncertainty shock is more detrimental for shortand long-term economic growth than usual financial and economic policy uncertainty shocks. Last, our methodology turns out to be an efficient way to disentangle “good†and “bad†macroeconomic effects of oil price uncertainty: when an oil price uncertainty shock is common to all commodities, then the macroeconomic effect is likely to be negative, similar to a global demand shock. However, when the uncertainty shock is only specific to the oil market, the short-run effect tends to be positive.