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John McDermott is an advisor in the Reserve Bank of New Zealand; this paper was completed while he was a Visiting Scholar in the Research Department. The authors would like to thank Ximena Cheetham, Hong Liang, Sam Ouliaris, Blair Rourke and Peter Wickham for helpful discussion and comments. The views expressed in the paper are those of the authors, and do not necessarily represent the views of either the IMF or the Reserve Bank of New Zealand.
According to the World Bank’s World Development Indicators, primary commodities accounted for 42 percent of developing (low- and middle-income) countries’ total merchandise exports in 1997, compared with 19 percent for developed (high-income) countries. Commodity dependence is even greater in Sub-Saharan Africa, where primary commodities account for about 75 percent of total exports in 1997.
Cuddington and Urzúa (1989) and Perron (1990) found support for a structural break in 1920/21. Powell (1991) prefers the hypothesis of three downward jumps in real commodity prices (in 1921,1938 and 1975), rather than a long-run trend decline. See Lutz (1999) for an overview of empirical tests of the Prebisch-Singer hypothesis.
Following Diebold and Rudebusch (1992), in the case of a tie the relevant ranks are replaced by the average of the ranks of tied observations.
The sup type of statistic has been analyzed in detail by Andrews (1993), where they are shown to have certain optimality properties.
Let Π⊂[0, 1] be the set of all possible breakpoints searched over, where in this case Π=[0.1, 0.9]. For our data series (1862-1999) this will means that the first 15 and last 15 observations will be excluded from being possible breakpoints. Testing whether a sample has a change point at its extremities is not desirable, because statistics tend to diverge to infinity since they cannot discriminate between true change points and boundary conditions.
The 2000 version of The Economist’s industrial commodities price index (base 1995=100, weighted by the value of world imports in 1994-96) has a weight of 45.9 percent for nonfood agricultural commodities and 54.1 percent for metals. The metals index consists of aluminum, copper, nickel, zinc, tin, and lead; the nonfood agricultural index consists of: cotton, timber, hides, rubber, wool 64s, wool 48s, palm oil, coconut oil, soybeans, and soybean oil. The commodity coverage of this index has changed over time—for details see The Economist (“A Raw Deal for Commodities”, April 17,1999 and “A Changed Commodity”, January 15, 2000).
The validity of this finding will be examined in Section IV below, when analyzing the presence or absence of a significant break in the variability of industrial commodity prices.
The correlation between the length of successive booms (-0.36) is just significant at the 15 percent level, while the correlation between the length of successive slumps (0.24) is not significant at even the 20 percent level; the 15 percent and 20 critical values (0.35 and 0.31) were calculated as 1.44/T½ and 1.28/T½, where T=17 is the number of successive booms and slumps.
The assumed independence of durations appears to be confirmed for large booms and slumps, as the correlation between the length of successive large booms or the length of successive large slumps (over the entire sample) are not significantly different from zero at even the 20 percent level of significance. The correlation between the length of successive large booms (-0.27) and length of successive large slumps (0.02) is much less than the 20 percent critical value (0.52), calculated as 1.28/T½, where T=6 is the number of successive large booms and large slumps.
Major world currencies began to float against one another in the last quarter of 1971, following the United States’ abrogation of the Bretton Woods gold clause in August 1971, which suspended convertibility of official dollar reserves into gold.
Using data for a group of 20 countries over 100 years, recent work by Taylor (2000) confirms the dramatically increased variability in both nominal and real exchange rates in the post-Bretton Woods period, in comparison with the gold standard and Bretton Woods fixed exchange rate periods. He also finds a very high correlation between real exchange rate volatility and nominal exchange rate volatility across all four exchange rate regimes.
While foreign supply of commodities is increased by a real appreciation of the dollar, foreign demand for commodities should fall, although it appears that most of the variability in commodity prices is driven by the supply side (Reinhart and Wickham (1994), Deaton and Miller (1996)). Dornbusch (1985) argued that a real appreciation of the dollar would increase the real price of any given commodity in terms of the foreign currency, reduce demand by the rest of the world and (for given supply) induce a fall in the commodity’s real market-clearing price (expressed in U.S. dollars).