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Growth in Emerging Market Economies and the Commodity Boom of 2003–2008: Evidence from Growth Forecast Revisions

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  • Elif Arbatli
  • Garima Vasishtha

Abstract

Demand for industrial raw materials from emerging economies, particularly emerging Asia, is widely believed to have fueled the surge in oil and industrial commodity prices during 2002-2008. The paper first presents a simple storage model in which commodity prices respond to market participant’s changing expectations of the future macroeconomic environment. In the model, the change in the price of a commodity depends on the unanticipated changes in demand factors, along with the real exchange rate, the real interest rate, and other factors that affect the marginal convenience yield. It then focuses on the role of demand factors by using a newly constructed monthly measure of unanticipated demand shocks for commodities based on revisions to professional forecasts of industrial production growth for a large group of emerging market and advanced economies. The empirical framework also controls for other macroeconomic factors that affect commodity prices, such as the real effective exchange rate (REER) of the U.S. dollar and the real interest rate. The results show that revisions to growth forecasts for emerging Asia play an important role in explaining movements in the real prices of industrial metals. In addition, the REER of the U.S. dollar is an important determinant of industrial commodity prices. For crude oil, growth forecast revisions for the U.S. and the real interest rate play a significant role in explaining real prices. Furthermore, growth surprises in general fall short of explaining the fast run-up in most commodity prices during 2006-2008, and the magnitude of the collapse in prices during the recent global financial crisis.

Suggested Citation

  • Elif Arbatli & Garima Vasishtha, 2012. "Growth in Emerging Market Economies and the Commodity Boom of 2003–2008: Evidence from Growth Forecast Revisions," Staff Working Papers 12-8, Bank of Canada.
  • Handle: RePEc:bca:bocawp:12-8
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    References listed on IDEAS

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    1. Lutz Kilian & Bruce Hicks, 2013. "Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003–2008?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(5), pages 385-394, August.
    2. Akram, Q. Farooq, 2009. "Commodity prices, interest rates and the dollar," Energy Economics, Elsevier, vol. 31(6), pages 838-851, November.
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    Cited by:

    1. Ron Alquist and Olivier Gervais, 2013. "The Role of Financial Speculation in Driving the Price of Crude Oil," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    2. Ludovic Gauvin & Cyril C. Rebillard, 2018. "Towards recoupling? Assessing the global impact of a Chinese hard landing through trade and commodity price channels," The World Economy, Wiley Blackwell, vol. 41(12), pages 3379-3415, December.
    3. Uslu, Çağrı Levent & Aydoğan, Ebru Tomris & Ketenci, Natalya, 2015. "Economic Growth, Financial Development, and Trade Openness in Emerging Markets: Panel Approach," MPRA Paper 64722, University Library of Munich, Germany.
    4. Chen, Jinyu & Zhu, Xuehong & Zhong, Meirui, 2019. "Nonlinear effects of financial factors on fluctuations in nonferrous metals prices: A Markov-switching VAR analysis," Resources Policy, Elsevier, vol. 61(C), pages 489-500.
    5. Mark Kruger & Kun Mo & Benjamin Sawatzky, 2016. "The Evolution of the Chinese Housing Market and Its Impact on Base Metal Prices," Discussion Papers 16-7, Bank of Canada.
    6. Alexander HARIN, 2014. "Partially Unforeseen Events. Corrections and Correcting Formulae for Forecasts," Expert Journal of Economics, Sprint Investify, vol. 2(2), pages 69-79.
    7. Atanu Ghoshray & Madhavi Pundit, 2021. "Economic growth in China and its impact on international commodity prices," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2776-2789, April.
    8. A�a�Yrı Levent Uslu & Ebru Tomris Aydo�Yan & Natalya Ketenci, 2016. "Impact Of Structural Breaks Presence On Economic Development Of Emerging Countries," Journal Articles, Center For Economic Analyses, pages 5-21, December.

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    More about this item

    Keywords

    Econometric and statistical methods; International topics;

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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