Commodity Prices and Markets
edited by Takatoshi Ito and Andrew K. Rose
University of Chicago Press, 2011
Cloth: 978-0-226-38689-8 | Electronic: 978-0-226-38690-4


Fluctuations of commodity prices, most notably of oil, capture considerable attention and have been tied to important economic effects, such as inflation and low rates of economic growth. Commodity Prices and Markets advances our understanding of the consequences of these fluctuations, providing both general analysis and a particular focus on the countries of the Pacific Rim. The volume addresses three distinct subjects: the difficulties in forecasting commodity prices, the effects of exogenous commodity price shocks on the domestic economy, and the relationship between price shocks and monetary policy. The ability to forecast commodity prices is difficult but of great importance to businesses and governments, and this volume will be invaluable to professionals and policy makers interested in the field.


Takatoshi Ito is professor of economics at the University of Tokyo and a research associate of the NBER and the Tokyo Center for Economic Research. Andrew K. Rose is the Bernard T. Rocca Jr. Professor of International Trade, director of the Clausen Center for International Business and Policy at the Haas School of Business, University of California, Berkeley, and a research associate of the NBER.



- Takatoshi Ito, Andrew K. Rose
DOI: 10.7208/chicago/9780226386904.003.0001
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I. Forecasting Currencies with Commodity Prices

- Jan J.J. Groen, Paolo A. Pesenti
DOI: 10.7208/chicago/9780226386904.003.0002
[commodity prices, Cash Reserve Ratio, CRR, commodity currencies, commodity indices, global economic developments]
This chapter discusses commodity prices, commodity currencies, and global economic developments. A synthetic survey of the different arguments used to rationalize and predict shifts in commodity prices is presented. The Cash Reserve Ratio (CRR) provides a systematic attempt to document and test the forecasting properties of a small set of commodity currencies as explanatory variables, with surprisingly promising results both in-sample and out-of-sample. For one specific commodity index, at the shortest forecasting horizons, the predictions of an exchange rate-based model are significantly better than those based on a random walk, although they do not outperform an autoregressive specification and at the one-year ahead horizon, the performance is reverted, as the CRR model significantly outperforms the autoregressive benchmark but not the random walk. It is observed that across commodity indices one cannot generate forecasts that are, on average, structurally more accurate and robust than those based on a random walk or autoregressive specifications. (pages 15 - 42)
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- Kalok Chan, Yiuman Tse, Michael Williams
DOI: 10.7208/chicago/9780226386904.003.0003
[commodity prices, commodity-exporting countries, commodity returns, commodity linked currencies, cross-asset]
This chapter examines relationships among currency and commodity futures markets based on four commodity-exporting countries' currency futures returns and a range of index-based commodity futures returns. These four commodity linked currencies are the Australian dollar, the Canadian dollar, the New Zealand dollar, and the South African rand. It is found that commodity/currency relationships exist contemporaneously, but fail to exhibit Granger-causality in either direction. The short-horizon commodity/currency relationships is analyzed using two types of restriction-based causality tests as well as a rolling out of sample forecasting methodology. No evidence of cross-asset causality or predictive ability is found in either direction. These results suggest that commodity returns information is rapidly incorporated into currency returns on a daily level. The results also suggest that economic expectations embedded in currency returns are rapidly incorporated into a country's terms-of-trade, which are embedded in commodity returns. (pages 47 - 76)
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II. Commodity Prices, the Terms of Trade, and Exchange Rates

- Christian Broda, John Romalis
DOI: 10.7208/chicago/9780226386904.003.0004
[exchange rate volatility, trade costs, bilateral trade, aggregate price indexes, exchange rate regimes]
This chapter identifies the relationship between trade and exchange rate volatility. A model of bilateral trade is used to estimate structurally the effect on trade of exchange rate volatility and exchange rate regimes such as fixed exchange rates and currency boards. The model highlights the role of trade in determining bilateral real exchange rate volatilities, and the differences in the impact of real exchange rate volatility on trade in different types of goods. These features of the model constitute the main building blocks of our identification strategy. The disaggregated data is used to exploit identification structure and test the predictions of the model. In this model, the bilateral pattern of real exchange rate volatility can differ across countries, even though the underlying shocks to each country are identical. Trade costs and aggregate price indexes belong in the equation system, suggesting that land area may not be suitable as an instrument. (pages 79 - 110)
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- Martin Berka, Mario J. Crucini
DOI: 10.7208/chicago/9780226386904.003.0005
[trade, commodity prices, Economist Intelligence Unit, EIU, inflation rates, retail prices, export prices]
This chapter conducts a forensic analysis of the sources of terms of trade variation of thirty-eight countries, over the period 1990 to 2005. The microprice data from the Economist Intelligence Unit (EIU) is used to parse the variance of the aggregate terms of trade into the contributions of individual goods. The commodity-level retail price inflation and price level inflation for the world as a whole is studied. This is accomplished by averaging U.S. dollar prices of individual goods and services across as many cities as available in the Economist Intelligence Unit retail price survey, the source of the consumer price data used here. The standard deviations of these commodity-level inflation rates range from a low of 3.7% to a high of 11%. The consumption terms of trade at local prices using local retail prices to measure the import and export prices rather than world prices are also elaborated. (pages 119 - 152)
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III. “Pass-Through” of Commodity Prices to the General Price Level

- Etsuro Shioji, Taisuke Uchino
DOI: 10.7208/chicago/9780226386904.003.0006
[oil prices, cost structure, Japanese domestic prices, time series analysis, domestic prices]
This chapter studies the effects of oil prices on domestic prices using Japanese data. This Japanese data was studied using time series analysis techniques and it confirmed the tendency of a declining pass-through of oil prices to domestic prices, for the period 1980 to 2000. Investigation of the Japanese input–output tables reveals that changes in the cost structure alone go a long way toward explaining the declining pass-through. The analysis indicates that the main reason behind the changing cost structure was not due to substitution effects or changes in relative quantities. It was rather due to changes in the relative prices and these played a more important role. A detailed analysis of the Japanese input–output table for the 2000s is also carried out. The results based on the time-varying parameter-vector autoregression are presented and are compared with the results of the input–output table results for the period 1980 to 2000. (pages 155 - 189)
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- Fukunaga Ichiro, Naohisa Hirakata, Nao Sudo
DOI: 10.7208/chicago/9780226386904.003.0007
[oil price changes, vector autoregression models, global oil market, macroeconomy, global demand shifts]
This chapter investigates the underlying causes of oil price changes and their transmission mechanisms in the United States and Japan. The oil price changes are decomposed into their component parts and the dynamic effects of each component on industry-level production and prices in both countries is estimated using identified vector autoregression models. The models incorporate two major extensions to the standard models. Instead of treating oil price changes as exogenous shocks, the underlying demand and supply shocks to the global oil market are identified. The positive response of production to the oil-specific demand shock might be the result of global demand shifts, especially in automobiles, toward more oil-efficient products made in Japan. Estimation results for the domestic macroeconomy blocks for the United States and Japan are discussed. Transmission mechanisms of oil price changes are surveyed and the estimation results are interpreted in more detail. (pages 195 - 236)
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- Biing-Shen Kuo, Su-Ling Peng
DOI: 10.7208/chicago/9780226386904.003.0008
[industrial structure, household expenditure, price pass-through, global commodity prices, Taiwan, global trends]
This chapter discusses price pass-through, household expenditure, and industrial structure in Taiwan. Pass-through caused by global commodity prices has had substantial impacts on the Taiwanese economy and has resulted in shifts in household expenditure patterns and the industrial structure. Inner structural and distribution effects in Taiwan are analyzed. A fundamental analysis of Taiwan's price transmission channel is presented and empirical estimation is used to calculate the degree of price pass-through. The results are used to analyze the characteristics of the Taiwan economy and compare them with global trends. By adopting various scenarios, the demand side and the supply side are analyzed in order to consider the economic outlook for Taiwan to see how the global commodity price fluctuations impact both consumers and producers. (pages 237 - 255)
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IV. Macroeconomic Effects of Oil Prices

- Junhee Lee, Joonhyuk Song
DOI: 10.7208/chicago/9780226386904.003.0009
[macroeconomy, Korean economy, oil price hikes, nonoil prices, monetary policy, wages]
This chapter analyzes the nature of oil price hikes and their impacts on the Korean economy. The chapter examines in detail whether the recent oil price hike is similar to or different from previous ones in terms of its origination. The impacts of the recent oil price hike on the Korean economy are investigated and compared to previous experiences. A dynamic stochastic general equilibrium model is built to examine the issue of using a structural model. The model incorporates a Taylor-type monetary policy rule, and monetary policy responds differentially to oil and nonoil prices, which correspond to noncore and core measures of inflation. It is found that energy and oil price are relatively flexible compared to nonoil prices and wages, and it is stated that monetary policy would stabilize the economy better if it could be made to accommodate oil price inflation rather than fight against it. (pages 263 - 294)
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- Sungbae An, Kang Heedon
DOI: 10.7208/chicago/9780226386904.003.0010
[Korean economy, imports, dynamic stochastic general equilibrium model, DSGE, vector autoregression, VAR, oil price shocks, Bayesian analysis]
This chapter describes the oil shocks using a dynamic stochastic general equilibrium (DSGE) model for the Korean economy. The Korean economy depends entirely on imports for its acquisition of crude oil, and households, entrepreneurs, and policymakers are interested in knowing to what extent the rise in oil prices affects the economy. Within an Bayesian estimation framework including DSGE-vector autoregressions (VARs), the empirical analysis used is based on Korean aggregate data. Using Bayesian analysis, the model is used to check the importance of each channel that transmits an oil price shock to the economy. It is found that the model economy produces reasonable posterior estimates of the structural parameters and works relatively well compared to impulse responses from the VAR with optimal prior weight from the DSGE model. A more elaborated model on government behavior is anticipated to investigate the pass-through of oil price shocks. (pages 295 - 321)
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Author Index

Subject Index