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The Model of Commodity Prices after Sir Arthur Lewis Revisited

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  • A Ghoshray

    (University of Bath)

  • Ashira Perera

Abstract

This paper builds on the work of Deaton and Laroque (2003) by formulating a nonlinear model of commodity prices. The paper makes three distinct contributions. First, a nonlinear model is constructed that explains long-run dynamics of commodity price behavior; secondly, more recent data is employed by updating the price, income and production indices; and finally advanced econometric techniques are adopted in order to investigate whether there is empirical evidence to support the theoretical underpinnings of the nonlinear model. Higher power tests broadly reverse the empirical findings of Deaton and Laroque’s (2003) model of commodity prices, lending support to the underlying theory proposed in this paper. Tests for cointegration provide evidence that the long-run relationship between world commodity production and world income for key commodities such as sugar, copper, and tin may be better explained by non-linear behavior.

Suggested Citation

  • A Ghoshray & Ashira Perera, 2011. "The Model of Commodity Prices after Sir Arthur Lewis Revisited," Department of Economics Working Papers 08/11, University of Bath, Department of Economics.
    • Handle: RePEc:eid:wpaper:32991
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    File URL: https://purehost.bath.ac.uk/ws/files/9439444/the_model_of_commodity.pdf
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    References listed on IDEAS

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    1. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 1-23.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    3. Kapetanios, George & Shin, Yongcheol, 2008. "GLS detrending-based unit root tests in nonlinear STAR and SETAR models," Economics Letters, Elsevier, vol. 100(3), pages 377-380, September.
    4. Deaton, Angus & Laroque, Guy, 2003. "A model of commodity prices after Sir Arthur Lewis," Journal of Development Economics, Elsevier, vol. 71(2), pages 289-310, August.
    5. Balagtas, Joseph Valdes & Holt, Matthew T., 2008. "AJAE Appendix: The Commodity Terms of Trade, Unit Roots, and Nonlinear Alternatives," American Journal of Agricultural Economics APPENDICES, Agricultural and Applied Economics Association, vol. 91(1), pages 1-21, April.
    6. Grilli, Enzo R & Yang, Maw Cheng, 1988. "Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows," The World Bank Economic Review, World Bank, vol. 2(1), pages 1-47, January.
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    Cited by:

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