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The Comovement in Commodity Prices

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  • Ron Alquist
  • Olivier Coibion

Abstract

We present a simple macroeconomic model with a continuum of primary commodities used in the production of the final good, such that the real prices of commodities have a factor structure. One factor captures the combined contribution of all aggregate shocks which have no direct effects on commodity markets other than through general equilibrium effects on output, while other factors represent direct commodity shocks. Thus, the factor structure provides a decomposition of underlying structural shocks. The theory also provides guidance on how empirical factors can be rotated to identify the structural factors. We apply factor analysis and the identification conditions implied by the model to a cross-section of real non-energy commodity prices. The theoretical restrictions implied by the model are consistent with the data and thus yield a structural interpretation of the common factors in commodity prices. The analysis suggests that commodity-related shocks have generally played a limited role in global business cycle fluctuations.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/140.

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Length: 63
Date of creation: 05 Jun 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/140

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Related research

Keywords: Commodity prices; Business cycles; Commodity price fluctuations; Economic models; comovement: factor models; factor analysis; global production; agricultural commodities; idiosyncratic shocks; aggregate shocks; exogenous shock; wholesale price; dynamic effects; aggregate consumption; import price; export price; oil prices; commodity exchange; output growth; oil shock; elasticity of substitution; nominal interest rate; price support; market equilibrium; global market; supply chain; unit of labor;

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References

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  1. Alexei Onatski, 2005. "Determining the number of factors from empirical distribution of eigenvalues," Discussion Papers, Columbia University, Department of Economics 0405-19, Columbia University, Department of Economics.
  2. Olivier Coibion, 2011. "Are the Effects of Monetary Policy Shocks Big or Small?," NBER Working Papers 17034, National Bureau of Economic Research, Inc.
  3. Olivier Coibion & Yuriy Gorodnichenko, 2010. "Monetary Policy, Trend Inflation and the Great Moderation:An Alternative Interpretation," Working Papers, Department of Economics, College of William and Mary 94, Department of Economics, College of William and Mary.
  4. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2013. "Primary commodity prices: Co-movements, common factors and fundamentals," Journal of Development Economics, Elsevier, Elsevier, vol. 101(C), pages 16-26.
  5. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-36, Board of Governors of the Federal Reserve System (U.S.).
  6. Kilian, Lutz & Murphy, Dan, 2010. "The Role of Inventories and Speculative Trading in the Global Market for Crude Oil," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7753, C.E.P.R. Discussion Papers.
  7. Kilian, Lutz, 2005. "Exogenous Oil Supply Shocks: How Big Are They and How Much do they Matter for the US Economy?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5131, C.E.P.R. Discussion Papers.
  8. Connor, Gregory & Korajczyk, Robert A, 1993. " A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, American Finance Association, vol. 48(4), pages 1263-91, September.
  9. Nikolay Gospodinov & Serena Ng, 2013. "Commodity Prices, Convenience Yields, and Inflation," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 206-219, March.
  10. Christiane Baumeister & Lutz Kilian, 2011. "Real-Time Forecasts of the Real Price of Oil," Working Papers, Bank of Canada 11-16, Bank of Canada.
  11. Christiane Baumeister & Gert Peersman, 2011. "The Role of Time-Varying Price Elasticities in Accounting for Volatility Changes in the Crude Oil Market," Working Papers, Bank of Canada 11-28, Bank of Canada.
  12. Seung C. Ahn & Alex R. Horenstein, 2013. "Eigenvalue Ratio Test for the Number of Factors," Econometrica, Econometric Society, Econometric Society, vol. 81(3), pages 1203-1227, 05.
  13. repec:taf:jnlbes:v:30:y:2012:i:2:p:326-336 is not listed on IDEAS
  14. Deren Unalmis & Ibrahim Unalmis & Derya Filiz Unsal, 2012. "On Oil Price Shocks: The Role of Storage," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 60(4), pages 505-532, December.
  15. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, American Economic Association, vol. 99(3), pages 1053-69, June.
  16. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 147-62, April.
  17. Kilian, Lutz & Lee, Thomas K., 2014. "Quantifying the speculative component in the real price of oil: The role of global oil inventories," Journal of International Money and Finance, Elsevier, Elsevier, vol. 42(C), pages 71-87.
  18. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 228-48, April.
  19. Kozicki, Sharon & Tinsley, P.A., 2009. "Perhaps the 1970s FOMC did what it said it did," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(6), pages 842-855, September.
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