Publication: More on the Energy/Non-Energy Price Link
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This note re-examines the energy/nonenergy price link. Using annual data from the period 1960 to 2008, it finds that the pass-through of energy price changes to the overall nonenergy commodity index is 0.28. At a more disaggregated level, the fertilizer index exhibited the largest pass-through (0.55), followed by agriculture (0.26) and metals (0.25).
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Publication More on the Energy/Non-Energy Commodity Price Link(2009-06-01)This paper examines the energy/non-energy commodity price link, based on a reduced form econometric model and using annual data from 1960 to 2008. The transmission elasticity from energy to the non-energy index is estimated at 0.28. At a more disaggregated level, the fertilizer index exhibited the largest elasticity (0.55), followed by precious metals (0.46), food (0.27), metals and minerals (0.25), and raw materials (0.11). By contrast, only a few price indices responded strongly to inflation, although the trend parameter estimate (often viewed as a proxy for technological progress) is negative for agriculture and positive for metals. A key implication of the pass-through results is that for as long as energy prices remain elevated, most non-energy commodity prices are expected to be high.Publication Analyzing Food Price Trends in the Context of Engel’s Law and the Prebisch-Singer Hypothesis(World Bank, Washington, DC, 2015-09)Income growth in emerging economies has often been cited as a key driver of the past decade’s com-modity price boom—the longest and broadest boom since World War II. This paper shows that income has a negative and highly significant effect on real food commodity prices, a finding that is consistent with Engel’s Law and Kindleberger’s thesis, the predecessors of the Prebisch-Singer hypothe-sis. The paper also shows that, in the long run, income influences real food prices mainly through the manufacturing price channel (the deflator), hence weakening the view that income growth exerts strong upward pressure on food prices. Other (short-term) drivers of food prices include energy costs, inventories, and monetary conditions.Publication The Great Plunge in Oil Prices(World Bank, Washington, DC, 2015-03)This note combines and distills existing and new research to inform discussion on the topical policy issue of oil prices. Following four years of relative stability at around $105 per barrel (bbl), oil prices have declined sharply since June 2014 and are expected to remain low for a considerable period of time. The drop in prices likely marks the end of the commodity supercycle that began in the early 2000s. Since the past episodes of such sharp declines coincided with substantial fluctuations in activity and inflation, the causes and consequences of and policy responses to the recent plunge in oil prices have led to intensive debates. This paper addresses four questions at the center of these debates, with particular emphasis on emerging market and developing economies: 1) How does the recent decline in oil prices compare with previous episodes? 2) What are the causes of the sharp drop and what is the outlook for oil price? 3) What are the economic and financial consequences? 4) What are the main policy implications? The decline in oil prices will lead to significant real income shifts from oil exporters to oil importers, likely resulting in a net positive effect for global activity over the medium term. However, several factors could counteract the global growth and inflation implications of the lower oil prices. These include weak global demand and limited scope for additional monetary policy easing in many countries. The disinflationary implications of falling oil prices may be muted by sharp adjustments in currencies and effects of taxes, subsidies, and regulations on prices. Regarding fiscal policy, the loss in oil revenues for exporters will strain public finances, while savings among oil importers could help rebuild fiscal space. Lower oil prices also present a window of opportunity to implement structural reforms. These include, in particular, comprehensive and lasting reforms of fuel subsidies, as well as energy taxes more broadly.Publication The Co-Movement Between Cotton and Polyester Prices(World Bank, Washington, DC, 2005-03)The authors examine the price linkages among polyester (the dominant chemical fiber), cotton (the dominant natural fiber), and crude oil (the dominant energy commodity), based on monthly data between 1980 and 2002. The modeling framework incorporates several aspects of the unit root econometrics literature. They find that: a) There is strong co-movement between cotton and polyester prices, well above the co-movement observed between these two prices and prices of other primary commodities. b) Crude oil prices have a stronger effect on polyester prices compared with cotton prices. c) Price shocks originating in the polyester market are transmitted at much higher speed to the cotton market than vice-versa.Publication Sources of Volatility during Four Oil Price Crashes(World Bank, Washington, DC, 2015-09)Previous sharp oil price declines have been accompanied by elevated ex post volatility. In contrast, volatility was much less elevated during the oil price crash in 2014/15. This paper provides evidence that oil prices declined in a relatively measured manner during 2014/15, with dispersion of price changes that was considerably smaller than comparable oil price declines. This finding is robust to nonparametric and GARCH measures of volatility. Further, the U.S. dollar appreciation exerted a strong influence on volatility during the recent crash; in contrast, the impact of shocks on equity markets was muted.
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