Commodity-Price Comovement and Global Economic Activity

NBER WP: Guided by the predictions of a general-equilibrium macroeconomic model with commodity prices, we apply a new factor-based identification strategy to decompose the historical sources of changes in commodity prices and global economic activity. The model yields a factor structure for commodity prices in which the factors have an economic interpretation: one factor captures the combined contribution of all aggregate shocks that affect commodity markets only through general equilibrium effects while other factors represent direct shocks to commodity markets. The model also provides identification conditions to recover the structural interpretation from a factor decomposition of commodity prices. We apply these methods to a cross-section of real commodity prices since 1968. The theoretical restrictions implied by the model are consistent with the data and thus yield a structural interpretation of the common factors in commodity prices. The analysis indicates that commodity-related shocks have contributed only modestly to global business cycle fluctuations.