Essays on Commodity Prices

This thesis is a collection of five empirical essays which examine microeconomic and macroeconomic aspects of high and volatile commodity prices. The first three chapters focus more on microeconomic issues of commodity prices. The second chapter examines the dynamic relationship between the commodity futures curve and inventory levels and finds a long-run cointegrating relationship between base metal spot prices, futures prices, inventories, and interest rates. This study presents some evidence that a temporary scarcity shock, modeled as a spot price shock which changes the slope of the futures curve, does cause a reaction in commodity markets. The third chapter investigates the gasoline price and income elasticities in the U.S. which confirms the structural change in the U.S. gasoline market where demand elasticity of gasoline price and income became more inelastic over the last decade. The fourth chapter examines the dynamic impact of demand and supply shocks in the U.S. and U.K. gasoline market where results show that the U.S. gasoline prices are impacted by the global demand shock. The last two chapters concentrate more on macroeconomic impacts of commodity prices on commodity exporting countries. The fifth chapter studies the fiscal behavior in developing oil-producing countries and examines whether it is procyclical. The results reveal that total expenditure is highly procyclical in the low and middle-income groups but countercyclical in high-income countries in the sample. The results confirm that political and institutional factors, as well as financing constraints, play a role in the cyclicality of fiscal policies in the oil producing developing countries. Finally, the sixth chapter examines the dynamic relationship between exchange rates and commodity prices to determine whether commodity prices Granger cause exchange rate or exchange rates Granger cause commodity prices for a group of advanced and developing commodity-exporting economies. The study finds stronger evidence of in-sample causality from exchange rates to commodity prices for most of the countries in the sample. One of the key findings is the consistent significant causality from exchange rates to commodities for Korea.