Commodity Price Cycles: Commonalities, Heterogeneities, and Drivers

Abstract

This paper examines commodity price cycles and their underlying drivers using a dynamic factor model from a sample of 39 monthly commodity prices for the period 1970:01–2019:12. We identity global and group specific cycles in commodity markets and include them in a structural VAR model together with measures of global economic activity and global inflation to disentangle their response to global demand, global supply and commodity market-specific shocks. We find the following main results: (i) There exists a global cycle in commodity markets that accounts for an increasing fraction of comovement in commodity prices over the past two decades, particularly for energy, metals, and precious metals; (ii) Results are heterogeneous across groups of commodities with group-specific commodity cycles existing for grains and precious metals over the full sample period, 1970-2019. Metal and energy prices exhibit within-group synchronization for the period 1970-1999; however, in recent years, their movements have become increasingly aligned with the global business cycle; (iii) Since 2000, the global commodity cycle is largely driven by global supply shocks, such as rapid productivity growth in emerging markets and developing economies, which increase demand for commodities; (iv) The large price spikes observed during the two most prominent commodity market boom-bust episodes of the past half-century (i.e., 1972-74 and 2006-08) are driven additionally by shocks orthogonal to global economic activity such as shifts in speculative demand for commodities.

Hamza Zahid

Economist

My research interests include international economics, macroeconomics, energy and environmental economics, and applied econometrics.