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The predictive power of commodity prices for future economic growth: evaluating the role of economic development

The predictive power of commodity prices for future economic growth: evaluating the role of economic development
The predictive power of commodity prices for future economic growth: evaluating the role of economic development
This paper investigates the extent to which commodity prices can predict economic growth, the growth exposure of the countries to specific commodity group, and whether the country stage of development matters for growth dependency on commodities. We use a novel time-varying mixed-frequency vector autoregressive model to jointly estimate causality between monthly commodity prices and quarterly economic growth for the period from January 1980 to March 2020. Our findings suggest that growth dependency on commodities varies over time and across different synthetic measures, but in general solid evidence of predictability is determined. The overall commodity index shows better performance in predicting economic growth than the segregated proxies of either fuel or non-fuel commodities in developed economies. However, the overall commodity index is as effective as the fuel index in predicting economic growth for their developing counterparts. We develop a new index of global commodity growth connectivity (GCGCI) to determine the economic growth dependency on commodities over time. Our results show that economic growth dependency on commodities has increased at least three times with financialization of commodity markets. The GCGCI for all commodities reveals a higher growth dependency on commodities in developing countries than developed ones in the post-financialization period. Interestingly, we find that growth decreases its reliance on fuel commodities in both developed and developing countries after financialization of commodity markets. Our findings bear implications for policymakers to design stabilization policies in an attempt to protect economies vulnerable to commodity price shocks and lay the foundation for sustainable economic growth.
commodity prices, commodity-growth index, economic growth, mixed-frequency VAR, predictability
1076-9307
1-23
Enilov, Martin
a33a63d6-b26a-4ab5-88bb-d92151983cde
Enilov, Martin
a33a63d6-b26a-4ab5-88bb-d92151983cde

Enilov, Martin (2023) The predictive power of commodity prices for future economic growth: evaluating the role of economic development. International Journal of Finance & Economics, 1-23. (doi:10.1002/ijfe.2821).

Record type: Article

Abstract

This paper investigates the extent to which commodity prices can predict economic growth, the growth exposure of the countries to specific commodity group, and whether the country stage of development matters for growth dependency on commodities. We use a novel time-varying mixed-frequency vector autoregressive model to jointly estimate causality between monthly commodity prices and quarterly economic growth for the period from January 1980 to March 2020. Our findings suggest that growth dependency on commodities varies over time and across different synthetic measures, but in general solid evidence of predictability is determined. The overall commodity index shows better performance in predicting economic growth than the segregated proxies of either fuel or non-fuel commodities in developed economies. However, the overall commodity index is as effective as the fuel index in predicting economic growth for their developing counterparts. We develop a new index of global commodity growth connectivity (GCGCI) to determine the economic growth dependency on commodities over time. Our results show that economic growth dependency on commodities has increased at least three times with financialization of commodity markets. The GCGCI for all commodities reveals a higher growth dependency on commodities in developing countries than developed ones in the post-financialization period. Interestingly, we find that growth decreases its reliance on fuel commodities in both developed and developing countries after financialization of commodity markets. Our findings bear implications for policymakers to design stabilization policies in an attempt to protect economies vulnerable to commodity price shocks and lay the foundation for sustainable economic growth.

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Int J Fin Econ - 2023 - Enilov - The predictive power of commodity prices for future economic growth Evaluating the role - Version of Record
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Submitted date: 7 May 2021
Accepted/In Press date: 6 April 2023
e-pub ahead of print date: 24 April 2023
Published date: 24 April 2023
Additional Information: Publisher Copyright: © 2023 The Authors. International Journal of Finance & Economics published by John Wiley & Sons Ltd.
Keywords: commodity prices, commodity-growth index, economic growth, mixed-frequency VAR, predictability

Identifiers

Local EPrints ID: 476963
URI: http://eprints.soton.ac.uk/id/eprint/476963
ISSN: 1076-9307
PURE UUID: 9c4e687d-f0f5-45c0-8b3d-e834fae34bc7
ORCID for Martin Enilov: ORCID iD orcid.org/0000-0002-7671-6975

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Date deposited: 22 May 2023 16:58
Last modified: 17 Mar 2024 04:13

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Author: Martin Enilov ORCID iD

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