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Commodity price uncertainty in developing countries

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  • Dehn,Jan

Abstract

Uncertainty about commodity export prices is important to developing countries -- both governments and producers -- that export primary commodities. Commodity export price uncertainty is typically measured as the standard deviation in the terms of trade. There are three problems with this approach: 1) Terms of trade indices are unsuitable as proxies for commodity price movements per se. 2) The shortness of terms of trade time series makes them inappropriate as a base for constructing time-varying uncertainty measures. 3) Simple standard deviation measures ignore the distinction between predictable and unpredictable elements in the price process, so they risk overstating uncertainty. 4) The author examines commodity price uncertainty in developing countries using new data for quarterly aggregate commodity price indices for 113 developing countries for the period 1957-97. Each index is a geometrically weighted index of 57 commodity prices. He constructs six different measures of uncertainty. The uncertainty measures confirm the importance of distinguishing between predictable and unpredictable components in the price process. But there is a positive, highly significant relationship between commodity export concentration and commodity price uncertainty for all six measures. No obvious link is found between a country's regional affiliation and its exposure to uncertainty. Sub-Saharan African countries, for example, are no more prone to commodity price uncertainty than countries in other commodity-producing regions, although to the extent that they depend more on commodities, they will be affected more than countries with more diversified export baskets. Similarly, there is no apparent relationship between a country's experiences of uncertainty and the type of commodities that dominate its exports-except that oil producers face greater uncertainty (because of discrete, well-publicized oil shocks). A measure of uncertainty based on generalized autoregressive conditional heteroskedasticity (GARCH) indicates considerable time variation in uncertainty. Uncertainty is sometimes characterized by discrete spikes, although uncertainty in countries exhibits a secular increase over time. Most countries experience uncertainty, which tends to persist. It is unclear what lies behind the time variation in uncertainty.

Suggested Citation

  • Dehn,Jan, 2000. "Commodity price uncertainty in developing countries," Policy Research Working Paper Series 2426, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2426
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    Citations

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    Cited by:

    1. Williams, Andrew, 2011. "Shining a Light on the Resource Curse: An Empirical Analysis of the Relationship Between Natural Resources, Transparency, and Economic Growth," World Development, Elsevier, vol. 39(4), pages 490-505, April.
    2. Paul J. Burke & Andrew Leigh, 2010. "Do Output Contractions Trigger Democratic Change?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 124-157, October.
    3. Joël Cariolle & Michaël Goujon, 2015. "Measuring Macroeconomic Instability: A Critical Survey Illustrated With Exports Series," Journal of Economic Surveys, Wiley Blackwell, vol. 29(1), pages 1-26, February.
    4. Tony Addison & Atanu Ghoshray & Michalis P. Stamatogiannis, 2016. "Agricultural Commodity Price Shocks and Their Effect on Growth in Sub-Saharan Africa," Journal of Agricultural Economics, Wiley Blackwell, vol. 67(1), pages 47-61, February.
    5. Musayev, Vusal, 2014. "Commodity Price Shocks, Conflict and Growth: The Role of Institutional Quality and Political Violence," MPRA Paper 59786, University Library of Munich, Germany.
    6. Joël CARIOLLE, 2012. "Measuring macroeconomic volatility - Applications to export revenue data, 1970-2005," Working Papers I14, FERDI.
    7. Collier, Paul & Dehn, Jan, 2001. "Aid, shocks, and growth," Policy Research Working Paper Series 2688, The World Bank.
    8. Hélène Ehrhart & Samuel Guerineau, 2012. "Commodity price volatility and Tax revenues: Evidence from developing countries," Working Papers halshs-00658210, HAL.
    9. Benedikt Goderis & Samuel W. Malone, 2011. "Natural Resource Booms and Inequality: Theory and Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113, pages 388-417, 06.

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