The 1984-86 Commodity Recession: Analysis of Underlying Causes

Debt and Conditionality under Endogenous Terms of Trade Adjustment

“…Econometric studies have often found that non-oil commodity prices can be explained well by business cycle developments in industrial countries and the dollar exchange rate (see Dornbusch (1985)). However, since 1983, there appears to be break in traditional relationships, (Morrison and Wattleworth, (1987)>. Chart 1, that plots an index of industrial production and the relative price of non-oil commodities since 1975, also suggests the existence of such break in the relationship between these two variables, An additional piece of evidence concerns the differentiated products argument.…”

Fiscal Policy, the Real Exchange Rate, and Commodity Prices

“…However, since many commodity exporters responded similarly, the outcome was an expansion in world commodity supplies, which further aggravated the decline in their relative price. As Morrison and Wattleworth (1988) note, this supply expansion played a significant role in explaining the observed weakness in relative commodity prices in 1984-86, despite the rapidly recovering demand for commodities in industrial countries.…”

“…This market-clearing condition lies at the heart of the inverse correlation between real commodity prices (in U.S. dollars) and the U.S. real exchange rate found in the data by Dornbusch (1985), Morrison and Wattleworth (1988), and Gilbert (1989). This theoretical model suggests that this sensitivity of commodity prices to the real exchange rate should depend on the relative elasticities of industrial country output with respect to commodity prices, and so would lie between 0 and -1.…”

The Macroeconomic Determinants of Commodity Prices

“…The empirical performance, as gauged by its forecasting performance out of sample, deteriorates considerably after 1984 as already noted by Morrison and Wattleworth (1987). In Figure 2 the dynamic forecasts from the estimation of equation (9) are plotted under the label "modell."…”

“…After 1984, however, despite a weakening dollar and a substantial rebound in the growth of output of several of the major industrial countries. real commodity prices remained soft, puzzling many commodity market analysts and further worsening the predicament of the many developing economies that are primary commodity exporters (see Morrison and Wattleworth (1987)). By late 1984. the demand-driven framework began systematically to overpredict real commodity prices by wide margins, and the forecasts have continued to be offtrack.…”