Determinants of Agricultural and Mineral Commodity Prices Jeffrey A. Frankel and Andrew K. Rose* Updated: August 28, 2018 Abstract Prices of most agricultural and mineral commodities rose strongly in the l p ast decade, peaking sharply in 2008. Popular explanations included strong global growth (especially from China and India), easy monetary policy (as reflected in low real interest rates or expected inflation), a speculative bubble (resulting from bandwagon expectations) , and risk (possibly resulting from geopolitical uncertainties). Motivated in part by this episode, this paper presents a theory that allows a role for macroeconomic determinants of real commodity prices, along the lines of the “overshooting” model: the resulting model includes global GDP and the real interest rate as macroeconomic factors. Our model also includes microeconomic determinants; we include inventory levels, measures of uncertainty, and the spot-forward spread. We estimate the equation in a variety of different ways, for eleven individual commodities. Although two macroeconomic fundamentals – global output and inflation – both have positive effects on real commodity prices, the fundamentals that seem to have the most consistent and strongest effects are microeconomic variables: volatility, inventories, and the spot-forward spread. There is also evidence of a bandwagon effect. Keywords : panel; data; empirical; GDP; real; interest; rate; volatility; inventory; spread; futures; bandwagon; speculation. JEL Classification Code s: Q11, Q39 Contact: Jeffrey A. Frankel Andrew K. Rose 79 JFK Street Haas School of Business Cambridge MA 02138-5801 Berkeley, CA 94720-1900 Tel: +1 (617) 496-3834 Tel: +1 (510) 642-6609 [email protected] [email protected] * Frankel is Harpel Professor, Kennedy School of Government, Harvard University and Director of the NBER’s International Finance and Macroeconomics Program. Rose is Rocca Professor, Economic Analysis and Policy, Haas School of Business, UC Berkeley, CEPR Research Fellow and NBER Research Associate. This is a substantial revision of a paper presented at a pre- conference June 15- 16, 2009 at Westfälische Wilhelms University Münster, M ü ue nster, Germany , June 15, 2009 . For research assistance we thank: Ellis Connolly, Marc Hinterschweiger, Imran Kahn and Frederico Meinberg. We thank Harry Bloch, Mike Dooley, Mardi Dungey, Renée Fry, Don Harding, Christopher Kent, Lutz Kilian, Mariano Kulish, Marco Lombardi, Philip Lowe, Warwick McKibbin, Simon Price, Tony Richards, Larry Schembri, Klaus Schmidt-Hebel, Susan Thorp, Shaun Vahey, Ine van Robays, and RBA conference 0
participants for suggestions and comments. The data sets, key output, and a current version of this paper are available on Rose’s website.
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