On the prevalence of trends in primary commodity prices

This paper applies new time series procedures to examine the Prebisch–Singer hypothesis of a secular deterioration in relative primary commodity prices. Specifically, we allow for (up to) two structural breaks in 24 price series, covering the 1900–98 period. For the majority of commodities, it is shown that the trend is not well represented by a single downward slope, but instead by a shifting trend that often changes sign over the sample period. Unlike some recent work that has also allowed for structural breaks, these results provide much less support for the Prebisch–Singer hypothesis.     

Re-testing Prebisch–Singer hypothesis: new evidence using Fourier quantile unit root test

The Prebisch–Singer hypothesis in economics asserts that over time the relative price of primary goods relative to manufactured goods should experience a downward trend. To test the hypothesis, we must first establish the unit root properties of the relative price term and then regress the stationary series on a trend term. We use the quantile unit root test which allows for both smooth unknown numbers and the form of breaks in the trend function through a Fourier function to show that the relative price of 23 out of 24 primary goods is stationary. However, the Prebisch–Singer hypothesis is supported only in half of the primary commodities.     

Whither the terms of trade? An elaboration of the Prebisch-Singer hypothesis

Movements in the prices of primary products and manufacturedgoods are analysed using a model that introduces differencesin wage and price determination between primary production andmanufacturing. Wages and prices in primary production are treatedas competitively determined, while prices and wages in manufacturingare determined by mark-up pricing and union-employer bargaining,respectively. The objective is to capture the influence of structuraldifferences between manufacturing and primary production onthe terms of trade between industrialised and developing worldsas discussed in the seminal contributions to the developmentliterature by Raul Prebisch and Hans Singer. The model is estimatedusing price and wage data from the post-World War II period.Support is found for the Prebisch-Singer hypothesis; however,our estimates suggest that, during periods of particularly rapidmanufacturing growth, there have been intervals of net improvementin the terms of trade of primary producers.     

Purchasing Power Parity By sectors From Selected European Countries: Cointegration and Structural Breaks

In this paper we study the long-run Purchasing Power Parity (PPP) hypothesis by traded and non-traded sectors using cointegration techniques in the presence of structural breaks, for a set of European countries during the period 1975:1-1995:12. This approach is complementary to many existing approaches to investigate the PPP Hypothesis. We find evidence in favor of long-run PPP hypothesis when commodity prices and used in the presence of structural breaks. This result lends support to the integration process in the European Union. [C22, F30]     

An analysis of multiple structural breaks in US relative farm prices

The movement of farm prices relative to other commodity prices is analysed for the period 1913:01 to 2003:12, investigating the number and time of structural breaks and discussing likely causes of structural breaks in the relative farm prices. Bai and Perron's (1998, 2003) multiple structural change test with a dynamic programming algorithm is used. This test makes it possible to have an efficient computation of the estimates of the break points as global minimizers of the sum of squared residuals. We find six structural breaks when we consider only the mean process and two breaks when we consider the mean and autoregressive processes. Possible causes for these breaks are discussed.     

Testing for weak-form efficiency of crude palm oil spot and future markets: new evidence from a GARCH unit root test with multiple structural breaks

There is a sizeable literature that tests for weak-form efficiency in commodity and energy spot and future prices. While many studies now allow for multiple structural breaks to address the criticism that conventional unit root tests have low power to reject the unit root null in the presence of structural change, the extant literature overlooks the fact that conventional unit root tests are biased in the presence of conditional heteroscedasticity. We apply a recently developed generalized autoregressive conditional heteroscedasticity (GARCH) unit root test with multiple structural breaks to crude palm oil spot and future prices and find much more evidence against weak-form efficiency than that found using tests that fail to allow for conditional heteroscedasticity. Our results point to the importance of allowing for heteroscedasticity when testing for efficiency in commodity and energy spot and future prices.     

A reexamination of trends in primary commodity prices

This paper conducts a reexamination of the Prebisch-Singer hypothesis by employing the unit root test proposed by Lee and Strazicich (2003) and Lee and Strazicich (2004) that allow for up to two structural breaks. Given the higher power of these tests compared to the Zivot and Andrews (1992) and Lumsdaine and Papell (1997) tests, rejection of the null can be considered as genuine evidence of stationarity. The main findings of this paper are that eleven out of twenty-four commodity prices are found to be difference stationary implying that shocks to these commodities tend to be permanent in nature. The remaining thirteen prices are found to exhibit trend stationary behavior with either one or two structural breaks. Most of the commodities that do not exhibit difference stationary behavior seem to contain no significant trends. There are fewer cases, in relation to past studies, of commodities that display negative trends thereby weakening the case for the Prebisch-Singer hypothesis.     

OUTPUT GROWTH AND STRUCTURAL REFORM IN LATIN AMERICA: HAVE BUSINESS CYCLES CHANGED?

This paper documents important changes in real gross domestic product (GDP) growth of six large Latin American countries. The main results can be summarized as follows. First, there is evidence of a structural break in real GDP toward stronger mean growth and a substantial reduction in volatility. Second, the timing of the breaks suggests that the important changes in economic policies of the 1980s and 1990s have been effective in permanently improving economic growth in the region. These changes in the growth processes imply recessions that are shorter in duration and milder in amplitude. The sustained increase in commodity prices observed in recent years explains an important share of growth in the region since 2003. But after accounting for the effect of commodity prices, there is even stronger evidence of a structural break in real GDP growth. (JEL E32)     

Speculation and corn prices

It is commonly asserted that speculative trading activities are largely behind the high and volatile food commodity price behaviour since 2006. In this article, we revisit this hypothesis by investigating how different speculative measures affect our conclusion on the role of speculation. Four speculative measures are considered, including index trading activities, non-commercial net long positions, Working’s speculative index, and an excessive speculative volume index. These four measures imply different underlying hypotheses about the role of speculation on commodity price movements and encompass most of the measures used in the recent literature on the role of speculation in commodity markets. Using a structural vector autoregressive (SVAR) model, we show a mixed impact of speculative trading on corn prices depending on the measure used. While shocks to index trading activities and excess speculation as measured by Working’s T have either zero or negative impact on corn prices, a positive shock to non-commercial net positions or the Tadesse index significantly increases the price of corn. However, the magnitude of the impact is not large, at most about $0.30 per bushel in real terms. Our findings are robust to structural breaks, alternative ordering of variables, and an alternative specification of the model.     

Cointegration analysis with structural breaks and deterministic trends: an application to the Canadian dollar

This article applies recent developments in cointegration analysis with structural breaks and deterministic trends to analyse the relationship between the real Canada–US exchange rate and commodity prices. Previous empirical studies disagree on whether these variables are cointegrated. The root of disagreement could be in the handling of deterministic trends and potential structural breaks. I find that even after controlling for these matters, the question of whether the real exchange rate and commodity prices are cointegrated for Canada remains unresolved.     

The agribusiness cycle and its wavelets

Cyclical exposures of farm profit to the economic environment are a fact of life for farmers. By utilising the farmer terms of trade as a net profit margin metric, we show how wavelet analysis can be used to decompose the cycle and trend, analyse causal influences, and detect structural breaks. With the NZ dairy industry as case study, the wavelet decomposition reveals that shorter cycles are almost wholly the result of commodity prices. Longer cycles are produced by the interaction of commodity prices with the exchange rate, but with a strong natural buffering element. The buffer was upset following the Asian crisis of 1997–1998, but may have restored itself since. A favourable long-term trend has appeared from the mid nineties onwards. Implications for risk management are briefly examined.      

A Test of Long-run Purchasing Power Parity Allowing for Structural Breaks*

If exchange rates and prices are integrated processes, standard econometric tests of the purchasing power parity (PPP) hypothesis may be biased towards rejection. This paper avoids this problem by using the Engle and Granger (1987) theory of cointegrated processes. If the absolute version of purchasing power parity is true, and nominal exchange rates and prices are integrated processes, inter-commodity arbitrage should ensure that the real exchange rate is stationary. The stationarity hypothesis is tested using Australian real exchange rate data for the 1890–1984 period We find that the effective real exchange rate cannot be modelled as a stationary process and therefore reject the absolute version of PPP. We also employ a test for structural breaks due to, for instance, the oil price shock and find mixed results. Another interpretation of our results is that the real exchange rate was affected by a series of permanent, real shocks during the sample period     

The Emergence of the Law of Value in a Dynamic Simple Commodity Economy

Abstract

A dynamic computational model of a simple commodity economy is examined and a theory of the relationship between commodity values, market prices and the efficient division of social labour is developed. The main conclusions are: (i) the labour value of a commodity is an attractor for its market price; (ii) market prices are error signals that function to allocate the available social labour between sectors of production; and (iii) the tendency of prices to approach labour values is the monetary expression of the tendency of a simple commodity economy to allocate social labour efficiently. The model demonstrates that, in the special case of simple commodity production, Marx's law of value can naturally emerge from multiple local exchanges and operate ‘behind the backs’ of actors solely via money flows that place budget constraints on their local evaluations of commodity prices, which are otherwise subjective and unconstrained.     

The price effects of joining the euro: modelling the Greek experience using non-linear price-adjustment models

The widely-held hypothesis that accession to the EMU has caused a structural increase in Greek consumer prices is tested. No econometric evidence of such an effect is found. There is strong evidence of (a) multiple structural breaks in the process driving Greek equilibrium consumer prices and (b) non-linear price adjustment. The findings explain the post-EMU accession acceleration in Greek prices as normal, equilibrium-restoring behaviour. They also have important policy implications for the countries planning to join the euro in the foreseeable future.     

Are EU budget deficits stationary?

In this paper, we test for the stationarity of European Union budget deficits over the period 1971–2006, using a panel of thirteen member countries. Our testing strategy addresses two key concerns with regard to unit root panel data testing, namely (1) the presence of cross-sectional dependence among the countries in the panel and (2) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ an AR-based bootstrap approach that allows us to test the null hypothesis of joint stationarity with endogenously determined structural breaks. In contrast to the existing literature, we find that the EU countries considered are characterised by fiscal stationarity over the full sample period irrespective of us allowing for structural breaks. This conclusion also holds when analysing sub-periods based on before and after the Maastricht treaty.     

Structural breaks and relative price convergence among US cities

This paper examines whether inclusion of structural breaks helps resolve the puzzling result of excessively slow speed of convergence in relative prices across US cities while using long time series data on CPI. With an endogenously determined single break in 1985 in annual CPI data for 17 major US cities between 1918 and 2010, the panel unit root test results provide overwhelming evidence of convergence of relative prices across cities, which is consistent with the existing literature. Most importantly, this study finds that the speed of convergence with structural break is faster than that reported by previous panel studies with no structural break that use similar long time series data. Furthermore, correcting for small-sample bias (the so-called “Nickell Bias”) and time aggregation bias generates a half-life of 3.9 years, which is 64% shorter than the half-life estimate with no structural break and no bias correction. The breakpoint in 1985 coincides with the beginning of the period of Great Moderation during which inflation, along with other macro variables, has become more stable and its impact on relative prices across US cities seems to have waned.     

Interdependencies in the energy–bioenergy–food price systems: A cointegration analysis

The present paper studies the interdependencies between the energy, bioenergy and food prices. We develop a vertically integrated multi-input, multi-output market model with two channels of price transmission: a direct biofuel channel and an indirect input channel. We test the theoretical hypothesis by applying time-series analytical mechanisms to nine major traded agricultural commodity prices, including corn, wheat, rice, sugar, soybeans, cotton, banana, sorghum and tea, along with one weighted average world crude oil price. The data consists of 783 weekly observations extending from January 1994 to December 2008. The empirical findings confirm the theoretical hypothesis that the prices for crude oil and agricultural commodities are interdependent including also commodities not directly used in bioenergy production: an increase in oil price by 1 $/barrel increases the agricultural commodity prices between 0.10 $/tonne and 1.80 $/tonne. Contrary to the theoretical predictions, the indirect input channel of price transmission is found to be small and statistically insignificant.     

‘I’ve been to Bali too’ (and I will be going back): are terrorist shocks to Bali's tourist arrivals permanent or transitory?

International visitor arrivals to Bali are examined using univariate and panel Lagrange multiplier (LM) unit root tests with one and two structural breaks to ascertain if shocks to the time path of tourist arrivals are permanent or transitory. The univariate LM unit root tests with one and two structural breaks fail to reject the null hypothesis of a unit root in international visitor arrivals to Bali. However, the panel LM unit root tests with one and two structural breaks applied to a panel of Bali's 11 major source markets reject the null and support the alternative hypothesis of a joint trend-stationary series with transitory shocks. This result suggests that, the effects of the recent terrorist acts on Bali on the growth path of tourist arrivals from major markets are only transitory and that as a consequence Bali's tourism sector is sustainable in the long run.     

Panel LM unit root tests with level and trend shifts

This paper considers a Lagrange multiplier (LM) based panel unit root test that allows for heterogeneous structural breaks in both the intercepts and slopes of a series. We note that many popular time series variables are likely to exhibit changing means and/or trends over time. Given that the usual tests will depend on the nuisance parameters indicating the locations of the trend breaks, we adopt a transformation procedure that makes our new panel unit root tests invariant to the nuisance parameters. To illustrate the importance of the power gain provided by our test, we examine the convergence hypothesis using relative ratios of per capita health care expenditures in 20 OECD countries. Our results provide evidence that the convergence hypothesis is supported.     

An interpretation of unequal exchange from Prebisch-Singer to Emmanuel

Emmanuel's view of the Center-Periphery trade relation is linked to a classical literature in trade and development theory which starts from the work of Prebisch, Singer and Lewis. A very simple general equilibrium Ricardian trade model is formulated to deal with terms of trade determination in the context of class conflict both in the Center and the Periphery. The model focuses attention on the effects of technical progress and changes in income distribution on employment levels in the Periphery, where labor surplus conditions are assumed to prevail.