Commodity Prices: How Important are Real and Nominal Shocks?

Abstract

We consider the response of both nominal and real commodity prices on world markets to real and nominal shocks by hypothesizing that nominal shocks can permanently affect nominal commodity prices, but can have only temporary effect on real commodity prices. Real shocks, in contrast, can have permanent as well as temporary effects on both nominal and real commodity prices. When nominal and real shocks are decomposed in this manner, real shocks are found to be of much greater importance to the observed movements in commodity prices. Further, when the shocks are related to the rate of growth of world industrial production as an indicator of business cycle movements, the results suggest that the impact of the business cycle is self-stabilizing in that there is an initial positive effect on growth in commodity prices followed by a fully offsetting negative effect. 3 1.

House prices, disposable income and permanent and temporary shocks

“…It is known that in a univariate model there is no unique way to decompose a variable into its permanent and temporary components (Enders, 1995). We employ the Blanchard and Quah (1989) (BQ) method and follow, amongst others, Lee (1995), Enders and Lee (1997), Hess and Lee (1999) and, more recently, Bloch et al (2009), in placing restrictions on the BMAR process to recover the permanent and temporary shocks to, in this case, house prices. Such decomposition is useful as it allows us to model the series disturbances using economic analysis and can be applied to any series whose time series behaviour is jointly determined.…”