Seminar

The Comovement in Commodity Prices: Sources and Implications

Olivier Coibion (University of Texas, Austin and NBER)

December 2, 2013, 17:00–18:30

Toulouse

Room MS001

Political Economy Seminar

Abstract

We present a simple macroeconomic model in which the real prices of commodities have a factor structure. In the model, a continuum of commodities is used in the production of the final good, and the real price of each commodity is endogenously determined. One factor captures the combined contribution of all aggregate shocks that do not have direct effects on commodity markets other than through general equilibrium effects on output. The other factors represent direct commodity shocks. The factor structure thus provides a way to decompose the underlying structural shocks. The theory also provides guidance on how empirical factors can be rotated to assign them a structural interpretation. We apply factor analysis and the identification conditions implied by the model to a cross-section of real non-energy commodity prices. The theoretical restrictions implied by the model are consistent with the data and thus yield a structural interpretation of the common factors in commodity prices. The analysis indicates that commodity-related shocks have generally played a limited role in global business cycle fluctuations.

Keywords

Commodity prices; comovement; factor models; JEL Codes: C38; E32; F44;