The predictive power of commodity prices for future economic growth: Evaluating the role of economic development

Abstract

This paper investigates the extent to which commodity prices can predict economic growth, the growth exposure of the countries to specific commodity group, and whether the country stage of development matters for growth dependency on commodities. We use a novel time‐varying mixed‐frequency vector autoregressive model to jointly estimate causality between monthly commodity prices and quarterly economic growth for the period from January 1980 to March 2020. Our findings suggest that growth dependency on commodities varies over time and across different synthetic measures, but in general solid evidence of predictability is determined. The overall commodity index shows better performance in predicting economic growth than the segregated proxies of either fuel or non‐fuel commodities in developed economies. However, the overall commodity index is as effective as the fuel index in predicting economic growth for their developing counterparts. We develop a new index of global commodity growth connectivity (GCGCI) to determine the economic growth dependency on commodities over time. Our results show that economic growth dependency on commodities has increased at least three times with financialization of commodity markets. The GCGCI for all commodities reveals a higher growth dependency on commodities in developing countries than developed ones in the post‐financialization period. Interestingly, we find that growth decreases its reliance on fuel commodities in both developed and developing countries after financialization of commodity markets. Our findings bear implications for policymakers to design stabilization policies in an attempt to protect economies vulnerable to commodity price shocks and lay the foundation for sustainable economic growth.

Time-Varying Impact of Commodity Prices on Output Growth and Inflation in the Eastern European Countries

“…As there are several cases of a positive link between commodity prices and output growth, it means that in Eastern European countries, commodity price shocks do not lead to a decline in investments or consumption, as it is customary in other industrial countries due to the negative wealth effect [12]. Higher savings could be another explanation behind the inverse relationship between commodity prices and output growth [22].…”

“…As reviewed recently by Enilov [12], the commodity-growth relationship is explained by numerous theories that lay stress upon production costs and household welfare. With a focus on commodity-importing countries, the commodity wealth channel implies that higher commodity prices lead to a decline in consumption and, therefore, output slowdown in the economy.…”

“…However, there is evidence for the USA that since the middle of the 1980s, oil prices have been affecting the economy indirectly by inducing monetary policy responses [11]. As stressed by Enilov [12], commodity price effects are not confined to the reliance on oil; the proportion of energy-dependent countries and mineraldependent countries was approximately one-third of all commodity-dependent economies, commodity price effects are not confined to the reliance on oil; the proportion of energydependent countries and mineral-dependent countries was approximately one-third of all commodity-dependent economies, with the fraction of economies dependent on agricultural commodities declining to slightly above 30%. In the presence of structural breaks, the commodity-growth relationship is not stable over time.…”

“…Although most of the past literature has focused on oil prices and their impact on the US economy, with a current commodity price research network centered on oil prices [29], studies on oil-growth relationships outside the US have been on the increase over the last few years [12]. Studies on the other commodity prices are rather scarce, especially for the CEE countries.…”