Commodity Price Fluctuations and Macro-economic Adjustments in the Developed Countries

Commodity price fluctuations have been troublesome in their destabilising effects on the foreign exchange earnings of developing countries. Recently, however, attention has been drawn to their role in transmitting inflation and in inducing macroeconomic and financial adjustments in the developed countries. These adjustments range from changes in employment and output (including the business cycle) to changes in money supply, interest rates and exchange rates. While questions of the direction of causality arise in this context, there is no doubt of the importance of assessing the impact of commodity price fluctuations on the economies of the developed countries. Of the different research issues raised, past studies have often suffered in two respects. First, the various linkages suggested have not been evaluated using common theoretical and econometric approaches. Second, the empirical tests employed have dealt for the most part with only one country and feature short, non-overlapping, time periods. The purpose of this paper is to report on results which stem from attempts to overcome these problems by employing a common theoretical approach and by examining the experience of six major developed countries over the period 1957 to 1986. The method of analysis followed involves Granger-causality tests based on Hsiao optimal lag selection.