20th Annual East Asian Seminar on Economics

Commodity Prices and Markets
June 26-27, 2009
Takatoshi Ito and Andrew Rose, Organizers

Jan Groen, Federal Reserve Bank of New York;Paolo Pesenti, Federal Reserve Bank of New York and NBER
Commodity Prices, Commodity Currencies, and Global Economic Developments

Groen and Pesenti aim to obtain forecasts of commodity price movements that can systematically improve upon naive statistical benchmarks. In doing so, they revisit the forecasting performance of changes in commodity currencies as efficient predictors of commodity price, as emphasized in the recent literature. In addition, they consider different types of factor-augmented models that use information from a large dataset containing a variety of indicators of supply and demand conditions across major developed and developing countries. These factor-augmented models use either standard principal components or the more novel partial-least-squares (PLS) regression to extract dynamic factors from the dataset. The forecasting analysis considers ten alternative indexes and sub-indexes of spot prices for three different commodity classes across different periods. Of the three aforementioned approaches, the exchange rate-based model and the PLS factor-augmented model are more prone to outperform the naive statistical benchmarks, and PLS factor-augmented models usually have a slight edge over the exchange rates-based approach. However, across the range of commodity price indexes, Groen and Pesentie are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications.

Kalok Chan, Hong Kong University of Science & Technology; Yiuman Tse, University of Texas at San Antonio; and Michael Williams, University of Texas at San Antonio
The Relationship between Commodity Prices and Currency Exchange Rates: Evidence from the Futures Markets

Chan, Tse, and Williams examine the relationship between four commodity-exporting countries' currency returns and a range of index-based commodity returns. They use daily futures data in order to investigate the dynamics between commodity prices and currency exchange rates while avoiding market imperfections in the commodity spot market. They find that commodity/currency relationships exist contemporaneously but fail to exhibit lead-lag behavior in either direction. Their results indicate that futures markets are efficient in processing information and that commodity and currency futures prices respond to information shocks simultaneously on a daily basis. The results are robust across different periods ranging from July 1992 through January 2009.

Christian Broda, University of Chicago and NBER; and John Romalis, University of Chicago and NBER
Identifying the Relationship Between Trade and Exchange Rate Volatility

Broda and Romalis develop a model in which international trade depresses real exchange rate volatility and exchange rate volatility affects trade in products differently according to their degree of differentiation. In particular, commodities are less affected by exchange rate volatility than are more highly differentiated products. These insights allow the authors to simultaneously identify both channels of causation, thereby structurally addressing one of the main shortcomings of the existing empirical literature on the effects of exchange rate volatility on trade — the failure to correct for reverse causality. Using disaggregate trade data for a large number of countries for the period 1970-97, they find strong results supporting the prediction that trade dampens exchange rate volatility. Once they address the reverse-causality problem, the large effects of exchange rate volatility on trade found in some previous literature are greatly reduced. In particular, the estimated effect of currency unions on trade is reduced from 300 percent to between 10 and 25 percent.

Ichiro Fukunaga, Bank of Japan; NAOHISA HIRAKATA; and Nao Sudo, Bank of Japan
The Effects of Oil Price Changes on the Industry-level Production and Prices in the U.S. and Japan

Fukunaga, Hirakata, and Sudo decompose oil price changes into three components, as in Kilian (2009), and estimate the dynamic effects of each component on industry-level production and prices in the United States and Japan. The way that oil price changes affect each industry depends on what kind of the underlying shock drives the oil price changes, as well as the industry's characteristics. Among the three structural shocks that tend to raise the oil price, an oil supply shock acts mainly as a negative supply shock for oil-intensive industries and mainly as a negative demand shock for other industries. A global demand shock acts mainly as a positive demand shock, and an oil-specific demand shock acts mainly as a negative supply shock for most industries in the United States. Meanwhile, an oil-specific demand shock acts mainly as a positive demand shock for many industries in Japan.

Biing-Shen Kuo, National Chengchi University; and Su-Ling Peng, CIER
Price Pass-Through, Household Expenditure and Economic Structure in Taiwan

Kuo and Peng calculate the extent to which global commodity prices are passed through to domestic prices in Taiwan. They find that the pass-through coefficients are 13.5 pecent and 17.3 percent from the global commodity price to the domestic price of food prices and energy prices, respectively. As for the pass through from domestic to core CPI, the estimated result for food of 18.9 percent is close to that of advanced economies. The percentage for energy is 19.24 percent and is higher than the IMF's (2008) estimate.These results reflect some key characteristics of Taiwan. First, Taiwan lies between advanced economies and emerging economies in economic development; so, the price pass-through is situated between that of advanced economies and emerging countries, in terms of food and fuel, even though Taiwan lacks natural resources. Next, the impact of domestic prices on the CPI for energy is similar to the pass-through effect from core CPI to CPI for food, although the weights for CPI-energy are smaller than for CPI-food. The energy-related industries are either monopolies or oligopolies. They are highly correlated with living industries, although the industrial structure is being upgraded and declining in terms of energy intensity. The authors also apply this approach to calculating the GCP price pass-through to the export price index (XPI) and import price index (MPI).The price pass-through for food is higher than for energy, both in relation to XPI and MPI. This might reflect the difference in degree of the industrial linkage effect and the industrial type, whether domestic-oriented or export-oriented. Basically, since the food-related industries are domestic-oriented and the pressures of world competitiveness are lower, the global commodity price might pass through at a higher level. Furthermore, the price pass-through in relation to XPI is lower than for MPI, both for food and energy. This also reflects the strength of world competitiveness for export-oriented goods and the characteristic of the trade structure. Owing to the export structure being concentrated in the industrial goods, the increase in the global commodity price may give a slight pass-through in the export price. The price pass-through also causes the household's expenditure to change markedly. The expenditures on fuel and power, transport, and communication decrease more rapidly than in food-related industries, although the global price pass-through to domestic price counted in core CPI is similar. This may reflect differences in the price elasticity of demand.Further, the authors find that if the first energy crisis had been postponed until the 1990s or the 21st century, the shocks eventually would have ceased with the passage of time. The price pass-through has more influence in the primary industries and secondary industries, even though the traditional industries experienced a hollowing out toward other economies in the 1990s. Basically, the higher the technology level, the smaller the impact on manufacturing industries as prices fluctuate and pass through. Besides, as the service industries expand and are upgraded, the final demand, output, and value added might rise in those domestic-oriented industries.

Joon Song, KDI
Oil and the Macroeconomy: A Case of Korea

Song and Lee investigate the nature of the recent oil price run-up and its impact on the Korean macroeconomy. They find that there have been a dramatic change in the macroeconomic responses to oil price in recent years. They also study whether monetary policy responds optimally to stabilize the macroeconomy in recent years. Based on an estimated DSGE model, they find that monetary policy has been aggressive with non-oil prices but accommodative with oil prices, and this is not different from the implications of the optimal policy rule, although the evidence is rather weak.

Etsuro Shioji, Hitotsubashi University; and Taisuke Uchino, Hitotsubashi University
Pass-Through of Oil Prices to Japanese Domestic Prices

Shioji and Uchino investigate changes in the influence of world crude oil prices on domestic prices in Japan. They confirm the declining pattern of the pass-through rate, both at the aggregate and sectoral levels for the period 1980-2000. Then, they show how the declining pass-through during this period is related to the changing cost structure of Japanese firms. Comparison of the two results indicates that structural changes in cost structure go a long way toward explaining the decline in the pass-through rate of oil prices. The main driving force behind these changes, in turn, is the price of oil itself: that is, as oil became cheaper, it became less and less important in the overall cost structure, and thus the pricing behaviors of firms became less responsive to its prices. The real factor, namely substitution between oil-intensive technology and less oil-intensive one, played a secondary role. The authors also study changing influences of oil prices during the period 2000-7. As one would expect, they find that as oil prices go through historical surges, pass-through rates of oil prices increase in many instances. However, those increases are muted and delayed in comparison to the drastic increases in oil prices.

Mario J. Crucini, Vanderbilt University and NBER; and Martin Berka, Massey University
The Consumption Terms of Trade and Commodity Prices

Sungbae An, Singapore Management University; and Heedon Kang, Bank of Korea
Oil Shocks in A DSGE Model for the Korean Economy

An and Kang evaluate the relevance and importance of oil-price shocks to each part of the economy. Their model economy uses oil imports either as direct consumption or an input of production. Their empirical analysis with Korean aggregate data reveals that the production motive of oil usage is important in improving the fit of the model, and that the pass-through of oil prices becomes stronger as oil prices increase.

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