Abstract
The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.
Paul Cashin
Fluctuations in world commodity prices and the terms of trade are among the most important external shocks affecting the macroeconomic performance and external balances of developing countries. This research summary selectively surveys IMF research on the stylized facts, and economic consequences, of movements in commodity prices and the terms of trade.
About 25 percent of world merchandise trade consists of primary commodities, and both long-term trends and short-term fluctuations in commodity prices are key determinants of developments in the world economy. Commodity price fluctuations, particularly in fuel and energy, transmit business cycle disturbances across countries and affect national rates of inflation. More than 50 developing countries depend on three or fewer commodities for more than half of their merchandise export earnings. IMF research on commodity prices has focused on better understanding the behavior of commodity prices.
Cashin, McDermott, and Scott (1999a) examine the properties of commodity-price cycles, and find that price slumps last longer than price booms; prices typically rise faster in short-lived booms than they fall in long-lived slumps; the severity of price booms and slumps is unrelated to their duration; and the probability of ending a commodity-price slump or boom is independent of the time already spent in the slump or boom. Cashin and McDermott (2002) use 140 years of commodity-price data to confirm that, while there are long-run downward trends in real commodity prices, such trends are rather small and variable, especially in comparison with the large variability of commodity prices. They also find that commodity markets have exhibited changing patterns of price instability around this weak underlying trend, with price variability since the 1970s being much larger than variability observed during the preceding 100 years.
Cashin, Liang, and McDermott (2000) document that shocks to commodity prices are long lasting, with half-lives typically in excess of five years—important information for policymakers seeking to design institutional arrangements to smooth the effects of such shocks. Cashin, McDermott, and Scott (1999b) find that the prices of unrelated commodities do not move together on world commodity markets; however, movement in the prices of related commodities such as beverages (tea and coffee) and metals (copper and tin) do appear to be synchronized. In an analysis of seven centuries of commodity-price data, Rogoff, Froot, and Kim (2001) conclude that while commodity goods-market arbitrage works reasonably well, the volatility and persistence of deviations from the law-of-one-price in the twentieth century are similar to those of the Middle Ages.
IMF research has also examined the main economic fundamentals underpinning the behavior of non-oil commodity prices, highlighting the roles of world industrial production, the real U.S. dollar exchange rate, and world commodity supplies as key determinants of prices (Borenzstein and others, 1994; Borenzstein and Reinhart, 1994). Brunner (2002) explores the important effect of climatic variability—arising from El Niño and La Niña weather patterns—on commodity supplies and the evolution of world commodity prices.
Research has paid special attention to the macroeconomic effects of movements in the price of oil. IMF researchers have examined the economic consequences of sharp spikes in the price of oil (Bayoumi and others, 2000; Hunt, Isard, and Laxton, 2002); and the differential sectoral effects of oil price changes on wages and employment (Keane and Prasad, 1995). Recent studies have explored issues related to the domestic pricing of petroleum products (Federico, Daniel, and Bingham, 2001; Gupta and others, 2002) and the hedging of oil-price risk by governments of oil-exporting countries (Daniel, 2001). Davis, Ossowski, and Fedelino (2003) examine fiscal policy formulation and implementation in oil-producing countries.
Closely related to the price of primary commodities is the terms of trade, which measures the purchasing power of a country’s export basket. IMF work in this area attempts to understand the channels through which terms of trade shocks affect external imbalances and the macroeconomic performance of low-income countries. Hoffmaister, Roldós, and Wickham (1998) show that terms of trade shocks have a much larger influence on fluctuations in output and the real exchange rate for the CFA franc countries of sub-Saharan Africa than they do for the non-CFA franc African countries. Cashin and McDermott (1998, 2003) find that temporary terms of trade shocks have a large effect on private saving and the current account balance. Several IMF papers have explored the correlation between shocks to the terms of trade and innovations in national consumption, investment, and output (Agénor, McDermott, and Prasad, 1999). Mendoza (1997) catalogs the large adverse effect of terms of trade variability on economic growth. Spatafora and Warner (1999) study the economic effects of terms of trade shocks on saving, investment, and the trade balance of oil-exporting countries.
Cashin and Pattillo (2000) analyze the persistence of terms of trade shocks in the commodity-exporting countries of sub-Saharan Africa: even among these relatively similar economies, the widely differing nature of the composition of commodity exports results in terms of trade shocks that are rather variable in duration. About half of the African countries experience short-lived terms of trade shocks, while one-third of the countries experience permanent shocks. The speed of reversion has important implications for the desirability of financing, rather than adjustment to, terms of trade shocks. Kent and Cashin (2003) examine the terms of trade of both developed and developing countries. Their findings support the theoretical predictions of the intertemporal approach to the current account: the greater the persistence of terms of trade shocks, the greater the likelihood that the current account balance will move in the opposite direction as the shock.
Studies have analyzed terms of trade and commodity prices as fundamental determinants of real exchange rates in commodity-exporting countries. The poor empirical track record of economic fundamentals in explaining exchange rate movements has been highlighted by Rogoff (1996). However, many countries are subject to large and frequent real commodity-price and terms of trade shocks, and recent IMF research has examined the real exchange rates of these “commodity currencies.” Chen and Rogoff (2002) find that, for commodity-exporting developed countries, Australia, Canada, and New Zealand, the dollar price of commodity exports exhibits a strong influence on real exchange rates. Similarly, Cashin, Céspedes, and Sahay (2002) find that for many commodity-dependent low-income countries, the real price of commodity exports and real exchange rates move together in the long run. These empirical regularities are stunningly robust in a world where nothing seems to explain exchange rate movements over long periods.
Closely related research has evaluated the usefulness of purchasing power parity-based models in assessing the competitiveness of exchange rates in low-income countries. MacDonald and Ricci (2003) conclude that the most important determinant of the long-run behavior of the real effective exchange rate of South Africa is the real price of its main commodity exports. Conversely, other studies find that commodity prices are affected by movements in the real exchange rates of G-3 countries (Dupont and Juan-Ramon, 1996) and the nominal exchange rate regimes of developed countries (Cuddington and Liang, 2000; Liang, 1998).
The Commodities Unit of the IMF’s Research Department provides information on primary commodity market developments. A bibliography of IMF research on commodity prices since 1991 is available at http://www.imf.org/external/np/res/commod/bib.htm. IMF commodity-price data are updated monthly and are available, from 1980 onward, at http://www.imf.org/external/np/res/commod/index.asp.
References
Agénor, Pierre-Richard, C. John McDermott, and Eswar Prasad, 1999, “Macroeconomic Fluctuations in Developing Countries—Some Stylized Facts,” IMF Working Paper 99/35; also published in World Bank Economic Review, 2001, Vol. 14, No. 2, pp. 251–85.
Bayoumi, Tamim, Ximena Cheetham, Hali Edison, Benjamin Hunt, Peter Isard, Manmohan Kumar, Maitland MacFarlan, David Robinson, and Blair Rourke, 2000, “The Impact of Higher Oil Prices on the Global Economy,” available at http://www.imf.org/external/pubs/ft/oil/2000/index.htm.
Borensztein, Eduardo, and Carmen Reinhart, 1994, ”The Macroeconomic Determinants of Commodity Prices,” IMF Staff Papers, Vol. 41, No. 2, pp. 236–61.
Borensztein, Eduardo, Mohsin Khan, Carmen Reinhart, and Peter Wickham, 1994, The Behavior of Non-Oil Commodity Prices, IMF Occasional Paper No. 112.
Brunner, Allan, 2000, “El Niño and World Primary Commodity Prices: Warm Water or Hot Air?” IMF Working Paper 00/203; also published in Review of Economics and Statistics, 2002, Vol. 84, No. 1, pp. 176–83.
Cashin, Paul, and C. John McDermott, 1998, “Terms of Trade Shocks and the Current Account,” IMF Working Paper 98/177; also published in Open Economics Review, 2002, Vol. 13, No. 3, pp. 219–36.
Cashin, Paul, and C. John McDermott, 2002, “The Long-Run Behavior of Commodity Prices:, Small Trends and Big Variability,” IMF Staff Papers, Vol. 49, No. 2, pp. 175–99.
Cashin, Paul, and C. John McDermott, 2003, “Intertemporal Substitution and Terms-of-Trade Shocks,” Review of International Economics, Vol. 11, No. 4, pp. 604–18.
Cashin, Paul, and C. John McDermott, and Alasdair Scott, 1999a, “Booms and Slumps in World Commodity Prices,” IMF Working Paper 99/155; also published in Journal of Development Economics, 2002, Vol. 69, pp. 277–96.
Cashin, Paul, and C. John McDermott, and Alasdair Scott, 1999b, “The Myth of Comoving Commodity Prices,” IMF Working Paper 99/169.
Cashin, Paul, and Catherine Pattillo, 2000, “Terms of Trade Shocks in Africa: Are They Short-Lived or Long-Lived?” IMF Working Paper 00/72; also Cashin, Paul, C. John McDermott, and Catherine Pattillo, “Terms of Trade Shocks in Africa: Are They Short-Lived or Long-Lived?” forthcoming in Journal of Development Economics, 2004.
Cashin, Paul, Luis Céspedes, and Ratna Sahay, 2002, “Keynes, Cocoa and Copper: In Search of Commodity Currencies,” IMF Working Paper 02/223; also forthcoming in Journal of Development Economics, 2004.
Cashin, Paul, Hong Liang, and C. John McDermott, 2000, “How Persistent Are Shocks to World Commodity Prices?” IMF Staff Papers, Vol. 47, No. 2, pp. 177–217.
Chen, Yu-Chin, and Kenneth Rogoff, 2002, “Commodity Currencies and Empirical Exchange Rate Puzzles,” IMF Working Paper 02/27; also published in Journal of International Economics, 2003, Vol. 60, No. 1, pp. 133–60.
Cuddington, John, and Hong Liang, 2000, “Will the Emergence of the Euro Affect World Commodity Prices?” IMF Working Paper 00/208.
Daniel, James, 2001, “Hedging Government Oil Price Risk,” IMF Working Paper 01/185.
Davis, Jeffrey, Rolando Ossowski, and Annalisa Fedelino, 2003, Fiscal Policy Formulation and Implementation in Oil-Producing Countries (Washington: International Monetary Fund).
Dupont, Dominique, and V. Hugo Juan-Ramon, 1996, “Real Exchange Rates and Commodity Prices,” IMF Working Paper 96/27.
Federico, Giulio, James Daniel, and Benedict Bingham, 2001, “Domestic Petroleum Price Smoothing in Developing and Transition Countries,” IMF Working Paper 01/75.
Gupta, Sanjeev, Benedict Clements, Kevin Fletcher, and Gabriela Inchauste, 2002, “Issues in Domestic Petroleum Pricing in Oil-Producing Countries,” IMF Working Paper 02/140.
Hoffmaister, Alexander, Jorge Roldós, and Peter Wickham, 1998, “Macroeconomic Fluctuations in Sub-Saharan Africa,” IMF Staff Papers, Vol. 45, pp. 132–60.
Hunt, Benjamin, Peter Isard, and Douglas Laxton, 2001, “The Macroeconomic Effects of Higher Oil Prices,” IMF Working Paper 01/14; also published in National Institute Economic Review, 2002, No. 179, pp. 87–103.
Keane, Michael, and Eswar Prasad, 1995, “The Employment and Wage Effects of Oil Price Changes: A Sectoral Analysis,” IMF Working Paper 95/37; also published in Review of Economics and Statistics, 1996, Vol. 78, pp. 389–400.
Kent, Christopher, and Paul Cashin, 2003, “The Response of the Current Account to Terms of Trade Shocks: Persistence Matters,” IMF Working Paper 03/143.
Liang, Hong, 1998, “The Volatility of the Relative Price of Commodities in Terms of Manufactures Across Exchange Regimes: A Theoretical Model,” IMF Working Paper 98/163.
MacDonald, Ronald, and Luca Ricci, 2003, “Estimation of the Equilibrium Real Exchange Rate for South Africa,” IMF Working Paper 03/44.
Mendoza, Enrique, 1997, ”Terms-of-Trade Uncertainty and Economic Growth,” Journal of Development Economics, Vol. 54, No. 2, pp. 323–56.
Rogoff, Kenneth, 1996, “The Purchasing Power Parity Puzzle,” Journal of Economic Literature, Vol. 34, No. 2, pp. 647–68.
Rogoff, Kenneth, Kenneth Froot, and Michael Kim, 2001, “The Law of One Price Over 700 Years,” IMF Working Paper 01/174.
Spatafora, Nikola, and Andrew Warner, 1999, “Macroeconomic and Sectoral Effects of Terms-of-Trade Shocks—The Experience of the Oil-Exporting Developing Countries,” IMF Working Paper 99/134.
Books from the IMF Who Will Pay? Coping with Aging Societies, Climate Change, and Other Long-Term Fiscal Challenges
By Peter S. Heller
Aging populations. Weather shocks. Globalization. Rapid technological change. Security threats. Policymakers today confront a number of developments that threaten to burden public budgets for decades to come, or bankrupt some entirely. Who Will Pay? Coping with Aging Societies, Climate Change, and Other Long-Term Fiscal Challenges responds to a growing need for governments to address the potential longer-term fiscal consequences of global developments.
While the full fiscal impact of some phenomena, such as aging populations or climate change, may not be felt for some time, the potential fiscal consequences of many of these trends may be experienced by a country far sooner. Other developments—globalization, global inequalities, rapid technological change, and security threats—are already affecting national fiscal situations and will continue to do so as the significance of these profound developments increase over time. Who Will Pay? suggests that addressing the impact of long-term fiscal issues of a country requires a multipronged approach, which starts with a long-term focus on fiscal sus-tainability; innovative analytical techniques; strengthened budget procedures; less precommitting to expenditures; a stronger sustained aggregate fiscal position; and more global coordinating efforts.
In brief, as William Easterly, Professor of Economics at New York University and Senior Fellow at the Center for Global Development, has said, “For too long, politicians, civil servants, and international organizations have had an obsessively myopic focus on this year’s budget spending, revenues, and deficits. Peter Heller brings a breath of fresh air to this claustrophobic debate, arguing that we need to look ahead to the looming budgetary challenges posed by aging populations, global warming, AIDS, and other crises with severe fiscal implications.”
IMF Staff Papers
Volume 51, Number 1
The Persistence of Corruption and Slow Economic Growth
Paolo Mauro
In Finance, Size Matters
Biagio Bossone and Jong-Kun Lee
Asymmetric Arbitrage and Default Premiums Between the U.S. and Russian Financial Markets
Mark P. Taylor and Elena Tchemykh
What Happened to Asian Exports During the Crisis?
Antonio Spilimbergo and Rupa Duttagupta
Financial Reforms and Interest Rate Spreads in the Commercial Banking System in Malawi
Montfort Mlachila and Ephraim Chirwa
High Inflation and Real Wages
Benedikt Braumann
A Brazilian-Type Debt Crisis
Assaf Razin and Efraim Sadka
Special Section on Data Issues Preface
Robert P. Flood
Compiling and Using Export and Import Price Indices
Jemma Dridi and Kimberly Dale Zieschang
IMF Staff Papers, the IMF’s scholarly journal, edited by Robert Flood, publishes selected high-quality research produced by IMF staff and invited guests on a variety of topics of interest to a broad audience, including academics and policymakers in IMF member countries. The papers selected for publication in the journal are subject to a rigorous review process using both internal and external referees. The journal and its contents (including an archive of articles from past issues) are available online at the Research at the IMF website at http://www.imf.org/research.