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Commodity Price Uncertainty and Shocks: Implications for Economic Growth

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  • Jan Dehn
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    Abstract

    It has long been believed that commodity price variability causes problems for primaryproducing developing countries, but there is less agreement about which particular manifestations of commodity price movements matter to developing countries. This paper tests the effects of ex post shocks and ex ante price uncertainty on economic growth using the Burnside and Dollar (1997) data set. The shock and uncertainty variables are constructed using a new data set of unique aggregate commodity price indices for 113 developing countries over the period 1957Q1-1997Q4. The analysis shows that per capita growth rates are significantly reduced by large discrete negative commodity price shocks. The magnitude of the effect of negative shocks on growth is very substantial, and appears to work independently of investment, which suggests that adjustment is achieved through severe reductions in capacity utilization. Negative shocks remain highly significant after controlling for government economic policy and institutional quality, which indicates that the result is not attributable exclusively to inappropriate policy responses on the part of governments. The paper also shows that positive shocks have no lasting impact on growth, which is consistent with the findings of both Deaton and Miller (1995) and Collier and Gunning (1999a), but overturns an earlier result which suggested that the long run effects of positive temporary shocks are negative. The third key result is that ex ante uncertainty does not affect growth, which holds for nine different definitions of uncertainty. Hence, what reduces growth is not the prospect of volatile world prices, but the actual realizations of negative shocks. The results are robust to changes in sample composition, changing the time series dimensions of the data, instrumenting for endogenous regressors, and across different estimation methods.

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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2000-10.

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    Date of creation: 01 May 2000
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    Handle: RePEc:oxf:wpaper:wps/2000-10

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    1. Robert Lensink & Howard White, 2000. "Aid allocation, poverty reduction and the Assessing Aid report," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 399-412.
    2. Guillaumont, Patrick & Jeanneney, Sylviane Guillaumont & Brun, Jean-Francois, 1999. "How Instability Lowers African Growth," Journal of African Economies, Centre for the Study of African Economies (CSAE), Centre for the Study of African Economies (CSAE), vol. 8(1), pages 87-107, March.
    3. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
    4. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(2), pages 141-163, September.
    5. Lutz, Matthias, 1994. "The effects of volatility in the terms of trade on output growth: New evidence," World Development, Elsevier, Elsevier, vol. 22(12), pages 1959-1975, December.
    6. Gyimah-Brempong, Kwabena & Traynor, Thomas L, 1999. "Political Instability, Investment and Economic Growth in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), Centre for the Study of African Economies (CSAE), vol. 8(1), pages 52-86, March.
    7. Paul Collier & Jan Willem Gunning, 1998. "Explaining African economic performance," Economics Series Working Papers WPS/1997-02.2, University of Oxford, Department of Economics.
    8. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(4), pages 1127-70, November.
    9. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
    10. Bleaney, Michael & Greenaway, David, 1993. "Adjustment to external imbalance and investment slumps in developing countries," European Economic Review, Elsevier, Elsevier, vol. 37(2-3), pages 577-585, April.
    11. Angus Deaton, 1999. "Commodity Prices and Growth in Africa," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(3), pages 23-40, Summer.
    12. Martin Mühleisen & Dhaneshwar Ghura & Roger Nord & Michael T. Hadjimichael & E. Murat Ucer, 1995. "Sub-Saharan Africa," IMF Occasional Papers 118, International Monetary Fund.
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    Cited by:
    1. Combes, Jean-Louis & Ebeke, Christian Hubert & Etoundi, Sabine Mireille Ntsama & Yogo, Thierry Urbain, 2014. "Are Remittances and Foreign Aid a Hedge Against Food Price Shocks in Developing Countries?," World Development, Elsevier, Elsevier, vol. 54(C), pages 81-98.
    2. Vedia Jerez, Daniel Hernan, 2007. "De riesgo y pánico: una analítica de volatilidad y crecimiento 1960-2006
      [About risk and panic, an overview of volatility and growth 1960-2006]
      ," MPRA Paper 21577, University Library of Munich, Germany.

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