The Interdependence between Commodity-Price and GDP Cycles: A Frequency-Domain Approach

Ojeda-Joya, Jair and Jaulin-Mendez, Oscar and Bustos-Pelaez, Juan (2015): The Interdependence between Commodity-Price and GDP Cycles: A Frequency-Domain Approach.

Abstract

We study the interdependence between aggregate commodity prices and world Gross Domestic Product (GDP) by performing two empirical exercises with long-run data that starts in the 19th Century. First, we compute long-term and medium-term cycles and measure their degree of synchronization for different leads and lags. Second, we perform causality tests on the frequency domain to understand better the nature of their interdependence. Our results show first, evidence of cycle synchronization only in the case of super cycles. Second, there is causality evidence from GDP to aggregate commodity prices mostly on long-run frequencies; therefore, commodity-price trends and super-cycles are demand driven. Third, there is some causality evidence between oil-prices and GDP on both causation directions. However, oil price fluctuations cause GDP on business-cycle frequencies only. Finally, in the case of metal prices, the evidence is unclear for both causality directions implying that they are not demand driven. Overall, our results show that the interdependence between commodity prices and GDP varies significantly across types of goods and fluctuation frequencies.

• Item Type: MPRA Paper
• Language: English
• Keywords: medium-term cycles, commodity prices, frequency domain, super cycles
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q0 - General > Q02 - Commodity Markets

References

Alquist, R., and O. Coibion. (2014). Commodity-Price Comovement and Global Economic Activity. NBER Working Paper # 20003. National Bureau of Economic Research

Alquist, R., L. Kilian, and R. Vigfusson, (2013). Forecasting the Price of Oil, In: Graham, E. and A. Timmermann (Eds), Handbook of Economic Forecasting, Volume 2A, Elsevier, Amsterdam, pp. 427-508.

Baffes, J., and X. Etienne (2016). “Analyzing Food Price Trends in the Context of Engel’s Law and the Prebisch-Singer Hypothesis,” Oxford Economic Papers, 68(3): 688-713.

Baxter, M., and King, R. (1999). Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series. The Review of Economics and Statistics, 81(4), 575-593.

Borio, C. (2014). The Financial Cycle and Macroeconomics: What Have We Learnt? Journal of Banking and Finance, 45:182-198.

Breitung, J., and B. Candelon. (2006). Testing for Short and Long-Run Causality: A Frequency-Domain Approach. Journal of Econometrics, 132: 363-378.

Breitung, J. and S. Schreiber, (2016). Assessing Causality and Delay Within a Frequency Band, IMK Working Paper #165, Macroeconomic Policy Institute, Düsseldorf, Germany.

Byrne, J., Fazio, G., and Fiess, N. (2013). Primary Commodity Prices: Co-movements, Common Factors and Fundamentals. Journal of Development Economics, 101: 16-26.

Cashin, P., and McDermott, J. (2002). The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability. IMF Staff Papers, 49(2): 175-199.

Christiano, L., and Fitzgerald, T. (2003). The Band Pass Filter. International Economic Review, 44 (2): 435-465.

Collier, P., and Goderis, B. (2012). Commodity Prices and Growth: An Empirical Investigation. European Economic Review, 56(6): 1241-1260.

Comin, D., and Gertler, M. (2006). Medium-Term Business Cycles. American Economic Review, 96(3): 523-551.

Cuddington, J., and Jerrett, D. (2008). Super Cycles in Real Metals Prices? IMF Staff Papers, 55(4): 541-565.

Dolado, J., & Lütkepohl, H. (1996). Making Wald Tests Work for Cointegrated VAR Systems. Econometric Reviews, 15: 369-386.

Doornik, J., and H. Hansen, (2008). An Omnibus Test for Univariate and Multivariate Normality, Oxford Bulletin of Economics and Statistics, 70: 927-939.

Drehmann, M., Borio, C., and Tsatsaronis, K. (2012). Characterising the Financial Cycle: Don’t Lose Sight of the Medium Term! BIS Working Papers #380, Bank for International Settlements.

Erten, B., and Ocampo, J. A. (2013). Super Cycles of Commodity Prices Since the Mid-Nineteenth Century. World Development, 44: 14-30.

Garnaut, R. (2012). The Contemporary China Resources Boom. Australian Journal of Agricultural and Resource Economics, 56(2): 222-43.

Gil-Alana, L. and R. Gupta (2014). “Persistence and Cycles in Historical Oil-Price Data,” Energy Economics, 45: 511-516.

Grilli, E., and M. Yang, (1988). Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What Long Run Shows. The World Bank Economic Review, 2 (1): 1-47.

Gubler, M., and M. Hertweck, (2013). Commodity Price Shocks and the Business Cycle: Structural Evidence for the U.S. Journal of International Money and Finance, 37: 324-352.

Harding, D., and A. Pagan, (2006). Synchronization of Cycles. Journal of Econometrics, 132: 59-79.

Harvey, D., N. Kellard, J. Madsen, and M. Wohar, (2017)."Long-Run Commodity Prices, Economic Growth, and Interest Rates: 17th Century to the Present Day," World Development, 89: 57-70.

Jacks, D. (2013). “From Boom to Bust: A Typology of Real Commodity Prices in the Long Run”. NBER Working Papers #18874, Cambridge, MA, USA.

Jerrett, D., J. Cuddington, (2008). Broadening the Statistical Search for Metal Price Super cycles to steel and Related Metals. Resources Policy, 33: 188-195.

Lütkepohl, H. (2007) New Introduction to Multiple Time Series Analysis, Springer Verlag, Berlin, 764 p.

Maddison, A. (2004). The World Economy: Historical Statistics. OECD: Development Centre Studies. 274 p.

Ocampo, J. A., and Parra, M. (2010). The Terms of Trade for Commodities since the Mid-Nineteenth Century. Journal of Iberian and Latin American Economic History, 28(1), pp. 11-43.

Schumpeter, J. (1939). Business Cycles. Volumes 1 and 2. New York, McGraw-Hill.

Toda, H., and T. Yamamoto, (1995). Statistical Inference in Vector Autoregressions with Possibly Integrated Processes. Journal of Econometrics, 98: 225-255.

Wei, Y. (2013). Commodity Prices, Manufactured Goods Prices and Inflation: Evidence from Japan. Economics Bulletin, 33(2), pp. 986-992.

Winkelried, D. (2016). “Piecewise Linear Trends and Cycles in Primary Commodity Prices”, Journal of International Money and Finance, 64: 196-213.