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Commodity Price Volatility and the Sources of Growth

  • Cavalcanti, V.
  • Mohaddes, K.
  • Raissi, M.

This paper studies the impact of the level and volatility of commodity terms of trade on economic growth, as well as on the three main growth channels: total factor productivity, physical capital accumulation, and human capital acquisition. We argue that volatility, rather than abundance per se, drives the "resource curse" paradox and also investigate empirically whether export diversification of commodity dependent countries contribute to faster growth. We use the standard system GMM approach as well as an augmented version of the pooled mean group (PMG) methodology of Pesaran et al. (1999) for estimation. The latter takes account of cross-country heterogeneity and cross-sectional dependence, while the former controls for biases associated with simultaneity and unobserved country-specific effects. Using both annual data for 1970-2007 and five-year non-overlapping observations, we find that while commodity terms of trade growth enhances real output per capita, volatility exerts a negative impact on economic growth operating mainly through lower accumulation of physical capital. Our results indicate that the negative growth effects of CTOT volatility offset the positive impact of commodity booms.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1112.

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Date of creation: 26 Jan 2011
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Handle: RePEc:cam:camdae:1112
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