A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Prices?

International Monetary Fund / by Serhan Cevik and Tahsin Saadi Sedik

[Abstract] This paper investigates the causes of extreme fluctuations in commodity prices from 1990 to 2010. Analyzing two very distinct commodities—crude oil and fine wine, we find that macroeconomic factors are the main determinants of commodity prices. Although supply constraints have the expected effect, aggregate demand growth is the key factor. The empirical results show that while advanced economies account for more than half of global consumption, emerging economies make up the bulk of the incremental change in demand, thereby having a greater weight in commodity price  formation. The results also show that the shift in the composition of aggregate commodity demand is a recent phenomenon.

[Michael Levi’s take] What do oil and wine have in common? A new working paper from two IMF economists, which is generating a lot of buzz, argues that they’re a lot more alike than you’d imagine. (Hat tip: Steve LeVine.) The authors look at the prices of crude oil and fine wine between 1998 and 2010 and show that they’re highly correlated. They find that that’s because they’re both driven primarily by demand – in particular, they argue that surging global economic growth over the period they’ve studied explains a huge fraction of the movement in both wine and oil prices. Supply constraints, on the other hand, seem to play at most a bit role…


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