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Determinants of Agricultural and Mineral Commodity Prices

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  • Frankel, Jeffrey A.
  • Rose, Andrew K.

Abstract

Prices of most agricultural and mineral commodities rose strongly in the past decade, peaking sharply in 2008. Popular explanations included strong global growth (especially from China and India), easy monetary policy (as reflected in low real interest rates or expected inflation), a speculative bubble (resulting from bandwagon expectations) and risk (possibly resulting from geopolitical uncertainties). Motivated in part by this episode, this paper presents a theory that allows a role for macroeconomic determinants of real commodity prices, along the lines of the “overshooting†model: the resulting model includes global GDP and the real interest rate as macroeconomic factors. Our model also includes microeconomic determinants; we include inventory levels, measures of uncertainty, and the spot-forward spread. We estimate the equation in a variety of different ways, for eleven individual commodities. Although two macroeconomic fundamentals – global output and inflation – both have positive effects on real commodity prices, the fundamentals that seem to have the most consistent and strongest effects are microeconomic variables: volatility, inventories, and the spot-forward spread. There is also some evidence of a bandwagon effect.

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Bibliographic Info

Paper provided by Harvard Kennedy School of Government in its series Scholarly Articles with number 4450126.

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Date of creation: 2010
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Publication status: Published in HKS Faculty Research Working Paper Series
Handle: RePEc:hrv:hksfac:4450126

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Cited by:
  1. Ratti, Ronald A. & Vespignani, Joaquin L., 2012. "Liquidity and Crude Oil Prices: China’s Influence Over 1996-2011," MPRA Paper 48900, University Library of Munich, Germany.
  2. Frankel, Jeffrey A., 2013. "Effects of Speculation and Interest Rates in a "Carry Trade" Model of Commodity Prices," Working Paper Series rwp13-022, Harvard University, John F. Kennedy School of Government.
  3. Ratti, Ronald A & Vespignani, Joaquin L., 2012. "Crude Oil Prices and Liquidity, the BRIC and G3 countries," Working Papers 15727, University of Tasmania, School of Economics and Finance, revised 17 Dec 2012.
  4. Anzuini, Alessio & Lombardi, Marco J. & Pagano, Patrizio, 2010. "The impact of monetary policy shocks on commodity prices," Working Paper Series 1232, European Central Bank.
  5. Morana, Claudio, 2013. "Oil price dynamics, macro-finance interactions and the role of financial speculation," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 206-226.
  6. Avalos, Fernando, 2014. "Do oil prices drive food prices? The tale of a structural break," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 253-271.
  7. Gospodinov, Nikolay & Jamali, Ibrahim, 2013. "Monetary policy surprises, positions of traders, and changes in commodity futures prices," Working Paper 2013-12, Federal Reserve Bank of Atlanta.
  8. Scott H. Irwin & Dwight R. Sanders, 2011. "Index Funds, Financialization, and Commodity Futures Markets," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(1), pages 1-31.

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