Commodity Price Cycles: Commonalities, Heterogeneities, and Drivers
Working paper
Abstract
This paper studies common commodity-price cycles and the shocks behind them. We estimate a multilevel dynamic factor model (DFM) for 35 real commodity prices over 1970:M4–2024:M7, separating global, group-specific, and idiosyncratic components of price variation. The global factor accounts for 12.3 percent of average commodity-price variation over the full sample, rising from 8.3 percent in 1970–1999 to 18.6 percent in 2000–2024. We then embed the estimated global commodity factor in a structural factor-augmented vector autoregression (FAVAR) with global economic activity and inflation to identify a global aggregate demand shock, a global aggregate supply shock, and a commodity-market shock. Aggregate-supply shocks generate more persistent commodity-price increases than aggregate-demand or commodity-market shocks, accompanied by higher output and an initial decline in inflation. Historical decompositions attribute the 2000s super-cycle mainly to a sustained sequence of positive aggregate-supply shocks, whereas the post-2020 cycle was less persistent and reflected a changing mix of aggregate-supply, commodity-market, and aggregate-demand shocks. The results show that similar increases in the global commodity factor can come from different shocks and therefore have different implications for output, inflation, and the persistence of commodity booms.
Hamza Zahid
Economist
My research interests include international economics, macroeconomics, energy and environmental economics, and applied econometrics.