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440 - Commodity prices, commodity currencies, and global economic developments

Author(s): Paolo A. Pesenti and Jan J.J. Groen, Federal Reserve Bank of New York

Commodity prices, commodity currencies, and global economic developmentspdf(529 kB) Choose translations of the previous link 

Summary for non-specialistspdf(88 kB) Choose translations of the previous link 

In this paper we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks, and revisit the forecasting performance of changes in commodity currencies as efficient predictors of commodity prices, a view emphasized in the recent literature. In addition, we consider different types of factor-augmented models that use information from a large data set 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 partial least squares (PLS) regression to extract dynamic factors from the data set. Our forecasting analysis considers ten alternative indices and sub-indices of spot prices for three different commodity classes across different periods. We .find that the exchange rate-based model and especially the PLS factor-augmented model are more prone to outperform the naive statistical benchmarks. However, across our range of commodity price indices we 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.

(European Economy. Economic Papers 440. March 2011. Brussels. PDF. 60pp. Tab. Graph. Bibliogr. Free.)

KC-AI-11- 439-EN (online)
ISBN 978-92-79-14925-2 (online)
doi: 10.2765/48683 (online)

JEL classification: E24; E62; J45

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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