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Commodity prices, commodity currencies, and global economic developments

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  • Paolo A. Pesenti
  • Jan J.J. Groen

Abstract

In this paper we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks, and revisit the forecasting performance of changes in commodity currencies as efficient predictors of commodity prices, a view emphasized in the recent literature. In addition, we consider different types of factor-augmented models that use information from a large data set containing a variety of indicators of supply and demand conditions across major developed and developing countries. These factor-augmented models use either standard principal components or partial least squares (PLS) regression to extract dynamic factors from the data set. Our forecasting analysis considers ten alternative indices and sub-indices of spot prices for three different commodity classes across different periods. We .find that the exchange rate-based model and especially the PLS factor-augmented model are more prone to outperform the naive statistical benchmarks. However, across our range of commodity price indices we are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications.

Suggested Citation

  • Paolo A. Pesenti & Jan J.J. Groen, 2011. "Commodity prices, commodity currencies, and global economic developments," European Economy - Economic Papers 2008 - 2015 440, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0440
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets

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