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Carmen M. Reinhart is an Economist in the Research Department. She holds a Ph.D. from Columbia University. Peter Wickham, Chief, Commodities and Special Issues Division of the Research Department, received his undergraduate degree from the University of Essex and subsequently studied at the University of British Columbia and the Johns Hopkins University. The authors would like to thank Eduardo Borensztein, John Cuddington, Mohsin Khan, and Jonathan Ostry for helpful comments and suggestions, and Ximena Cheetham for excellent research assistance.
Unless otherwise noted, real commodity prices refer to the IMF all non‐fuel commodity price index deflated by the IMF index of manufacturing export unit values (MEUV) of industrial countries. Both indices are in U.S. dollars.
Export diversification is not the only factor explaining the marked regional differences in export performance, however. As will be discussed below, the volume of exports of agricultural commodities surged in Asia during the 1970s and 1980s while it declined in Africa during the same period.
The sustained decline predates our sample period of 1900–92. Using a different commodity index that begins in 1854, Boughton (1991) documents the decline of real commodity prices during the second half of the nineteenth century. The source of the data plotted in Figure 1 is Grilli and Yang (1988) for 1900–86 and was updated by the authors for 1987–92.
As will be shown later, commodity prices exhibit heteroskedastic behavior in the sample considered. Hence, the PP test, which can handle more general forms of heteroskedasticity, is the more appropriate unit root test.
The unit root hypothesis could be rejected for metals at the 10 percent confidence level.
As discussed below, the main stylized facts that emerge, as well as the policy implications, will not change considerably if the Perron test results are taken at face value and the indices for all commodities and metals are treated as stationary around a broken trend. For the food and beverage indices, this is not an issue, as all the test results uniformly indicate the existence of a unit root.
This result is in line with the findings of Cuddington and Urzua (1989), who, using annual data for this index for 1900–83, find that about 39 percent of the shocks to real commodity prices are permanent.
The same tests performed on the entire 1900–92 period do not indicate heteroskedastic disturbances. Volatility was high in the pre‐World War II period, diminished drastically during the 1950s and 1960s, and rose again in the early 1970s. Hence, shocks to commodity prices were relatively small only in a sub‐ sample within a period of 90 years. Not surprisingly, the tests for heteroskedasticity do not find that shocks to commodity prices were smaller at the beginning of the sample than at the end.
For a rational expectations model that is capable of generating predictions that match some of the observed characteristics of commodity price behavior described here (high volatility, skewness, and excess kurtosis), see Deaton and Laroque (1992).
This issue is not trivial, as excess kurtosis increases the value of precautionary saving. For example, for a level of consumption sufficiently close to subsistence, a large adverse shock in the absence of precautionary saving could have devastating effects.
For a discussion of the problems associated with fitting low ARMA processes to macroeconomic data, see Cochrane (1988).
Since coffee has a large weight in the beverage index, this price spike is associated with a severe frost in Brazil.
We have assumed there is no irregular component.
These correlations are not spurious, since, by construction, the cycles are stationary series.
The Schwarz criterion was employed to select the appropriate specification.
The estimated AR processes are not reported, but the results are available from the authors.
The scales in the panels of Figure 6 are not uniform across commodities, with beverages having the widest scale (reflecting the higher variance of its cycle) and all commodities having the narrowest.
For a discussion of the factors behind the slowdown in growth, see, for example, Adams, Fenton, and Larsen (1987).
Most partial and general equilibrium models suggest that real prices for most agricultural products would rise if reforms were implemented by the industrial countries. See Goldin and Knudsen (1990).
Unless the breakdown of the ICA was fully anticipated, in which case prices would have already reacted.
Effective early in 1993, domestic prices for metals were liberalized and other steps were also taken to reduce the scope for illegal trading.
Such compensatory finance is a loan or a grant to the monetary authority or government of the country. It need not therefore necessarily find its way to those most directly affected by an export shortfall.