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Forecasting and Analyzing World Commodity Prices

Listed author(s):
  • René Lalonde
  • Zhenhua Zhu
  • Frédérick Demers

The authors develop simple econometric models to analyze and forecast two components of the Bank of Canada commodity price index: the Bank of Canada non-energy (BCNE) commodity prices and the West Texas Intermediate crude oil price. They present different methodologies to identify transitory and permanent components of movements in these prices. A structural vector autoregressive model is used for real BCNE prices and a multiple structural-break technique is employed for real crude oil prices. The authors use these transitory and permanent components to develop forecasting models. They assess various aspects of the models' performance. Their main results indicate that: (i) the world economic activity and real U.S.-dollar effective exchange rate explain much of the cyclical variation of real BCNE prices, (ii) real crude oil prices have two structural breaks over the sample period, and recently their link with the world economic activity has been quite strong, and (iii) the models outperform benchmark models, namely a vector autoregressive model, an autoregressive model, and a random-walk model, in terms of out-of-sample forecasting.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 03-24.

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Length: 41 pages
Date of creation: 2003
Handle: RePEc:bca:bocawp:03-24
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Web page: http://www.bank-banque-canada.ca/

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