DP319 Commodity Prices, Financial Markets and World Income: A Structural Rational Expectations Model

• David Vines Prathap Ramanujam
1 Jun 1989

In this we specify and jointly estimate supply, demand and price equations for four aggregate commodity groups: food, beverages, agricultural raw materials and metals. This simple structural model allows us, for each group of commodities, to incorporate stock data for the first time, and to include forward-looking expectations. Estimates of this new model reveal that industrial production in developed countries has large and significant short-run effects on the demand for primary commodities. The estimates also suggest (but cannot definitely confirm) that industrial production in developed countries has large permanent effects: these effects differ across the commodity groups for plausible reasons.