LUTZ KILIAN, University of Michigan
at Ann Arbor - Department of Economics, Centre for Economic Policy Research
(CEPR)
Email: lkilian@umich.edu
XIAOQING ZHOU, Bank of Canada
Email: xzhou@bankofcanada.ca
It is
widely understood that the real price of globally traded commodities is
determined by the forces of demand and supply. One of the main determinants of
the real price of commodities is shifts in the demand for commodities
associated with unexpected fluctuations in global real economic activity. There
have been numerous proposals for quantifying global real economic activity. We
discuss which criteria a measure of global real activity must satisfy to be
useful for modeling industrial commodity prices, we examine which of the many
alternative measures in the literature are most suitable for applied work, and
we explain why some popular measures are inappropriate for modeling commodity
prices. Given these insights, we reexamine in detail the question of whether
global real economic activity has declined since 2011 and by how much. Drawing
on a range of new evidence, we show that the global commodity price boom of the
2000s appears to have been largely transitory. Our analysis has important
implications for the design of structural models of commodity markets, for the
analysis of the transmission of commodity price shocks to commodity-importing
and exporting economies, and for commodity price forecasting.
Email: lkilian@umich.edu
XIAOQING ZHOU, Bank of Canada
Email: xzhou@bankofcanada.ca
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