Structural breaks and long-run trends in commodity prices
The oil shocks of the 1970s, which quadrupled the price of petroleum, marked the end of an abnormal period of price stability and renewed interest in predicting the evolution of commodity prices. But most subsequent studies have focused on the short-run effects of price fluctuations, mainly because they greatly affect the foreign trade of developing countries. Sophisticated compensation mechanisms, such as commodity funds, have been introduced to counterbalance the transitory effects of price shocks. But the long-term evolution of prices also affects policy design and development strategies and may have a more important role in fostering long-run growth. The evidence presented by Prebisch (1950) and Singer (1950) of a secular negative trend in the price of commodities in 1870-1945 implies an increasingly weak position for developing countries relative to industrial economies. This hypothesis by Prebisch and Singer has been strongly debated, both theoretically and empirically, during the past four decades. Using recent advances in econometric theory, the authors analyze the long-run dynamics of the price of the 24 most-traded commodities in 1900-92. The method they use tests for nonstationarity (unit roots) in the series with a technique that allows structural breaks to be endogenously determined. The results show that 15 of the 24 commodity prices present negative trends, six are trendless, and three exhibit positive trends. Thus, the Prebisch-Singer hypothesis though not universal, holds for most commodities. This evidence rejects, to some extent, previous evidence by Cuddington (1992) and others. The authors extend the econometric analysis to determine the persistence of shocks to commodity prices. Knowledge of the persistence of shocks is important when designing counterbalancing policies such as commodity funds. The authors use a nonparametric estimator of persistence (the multiple variance ratio) and find that 19 of the 24 commodity prices present persistence levels substantially lower than previous estimates. This evidence suggests that there may be substantial room for stabilization and price support mechanisms for most commodities.
|Date of creation:||31 Jan 1995|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Reinhart, Carmen & Wickham, Peter, 1994.
"Commodity Prices: Cyclical Weakness or Secular Decline?,"
8173, University Library of Munich, Germany.
- Carmen M. Reinhart & Peter Wickham, 1994. "Commodity Prices: Cyclical Weakness or Secular Decline?," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 175-213, June.
- Reinhart, Carmen & Wickham, Peter, 1994. "Non-oil commodity prices: Cyclical weakness or secular decline?," MPRA Paper 13871, University Library of Munich, Germany.
- Peter Wickham & Carmen Reinhart, 1994. "Commodity Prices; Cyclical Weakness or Secular Decline?," IMF Working Papers 94/7, International Monetary Fund.
- Rudebusch, Glenn D, 1993.
"The Uncertain Unit Root in Real GNP,"
American Economic Review,
American Economic Association, vol. 83(1), pages 264-272, March.
- Prebisch, Raúl, 1950. "The economic development of Latin America and its principal problems," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 29973, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
- Behrman, Jere R., 1987. "Commodity price instability and economic goal attainment in developing countries," World Development, Elsevier, vol. 15(5), pages 559-573, May.
- Chow, K. Victor & Denning, Karen C., 1993.
"A simple multiple variance ratio test,"
Journal of Econometrics,
Elsevier, vol. 58(3), pages 385-401, August.
- Tom Doan, "undated". "CHOWDENNING: RATS procedure to perform Chow-Denning multiple variance ratio test," Statistical Software Components RTS00035, Boston College Department of Economics.
- Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
- Andrew W. Lo & Craig A. MacKinlay, .
"The Size and Power of the Variance Ratio Test in Finite Samples: A Monte Carlo Investigation,"
Rodney L. White Center for Financial Research Working Papers
28-87, Wharton School Rodney L. White Center for Financial Research.
- Lo, Andrew W. & MacKinlay, A. Craig, 1989. "The size and power of the variance ratio test in finite samples : A Monte Carlo investigation," Journal of Econometrics, Elsevier, vol. 40(2), pages 203-238, February.
- Andrew W. Lo & A. Craig MacKinlay, 1988. "The Size and Power of the Variance Ratio Test in Finite Samples: A Monte Carlo Investigation," NBER Technical Working Papers 0066, National Bureau of Economic Research, Inc.
- Banerjee, Anindya & Lumsdaine, Robin L & Stock, James H, 1992.
"Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 10(3), pages 271-287, July.
- Anindya Banerjee & Robin L. Lumsdaine & James H. Stock, 1990. "Recursive and Sequential Tests of the Unit Root and Trend Break Hypothesis: Theory and International Evidence," NBER Working Papers 3510, National Bureau of Economic Research, Inc.
- Vial, Joaquin, 1992. "Copper consumption in the USA: Main determinants and structural changes," Resources Policy, Elsevier, vol. 18(2), pages 107-121, June.
- Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
- D. Sapsford & P. Sarkar & H. W. Singer, 1992. "The prebisch‐singer terms of trade controversy revisited," Journal of International Development, John Wiley & Sons, Ltd., vol. 4(3), pages 315-332, 05.
- Danny Quah, 1988.
"The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds,"
498, Massachusetts Institute of Technology (MIT), Department of Economics.
- Quah, Danny, 1992. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," Econometrica, Econometric Society, vol. 60(1), pages 107-18, January.
- Danny Quah, 1991. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," FMG Discussion Papers dp126, Financial Markets Group.
- Danny Quah, 1991. "The Relative Importance of Permanent and Transitory Components: Identi- fication and Some Theoretical Bounds," NBER Technical Working Papers 0106, National Bureau of Economic Research, Inc.
- Perron, Pierre, 1989.
"The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis,"
Econometric Society, vol. 57(6), pages 1361-1401, November.
- Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
- Cuddington, John T., 1992. "Long-run trends in 26 primary commodity prices : A disaggregated look at the Prebisch-Singer hypothesis," Journal of Development Economics, Elsevier, vol. 39(2), pages 207-227, October.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1406. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.