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The long-run behaviour of the terms of trade between primary commodities and manufactures: a panel data approach

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Abstract

This paper examines the Prebisch and Singer hypothesis using a panel of twenty-four commodity prices from 1900 to 2010. The modelling approach stems from the need to meet two key concerns: (i) the presence of cross-sectional dependence among commodity prices; and (ii) the identification of potential structural breaks. To address these concerns, the Hadri and Rao (Oxf Bull Econ Stat 70:245–269, 2008) test is employed. The findings suggest that all commodity prices exhibit a structural break whose location differs across series, and that support for the Prebisch and Singer hypothesis is mixed. Once the breaks are removed from the underlying series, the persistence of commodity price shocks is shorter than that obtained in other studies using alternative methodologies.

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Notes

  1. Reinhart and Wickham (1994) do not use the GY dataset, but quarterly data (1957q1 to 1993q2) for major commodity groupings: all non-oil commodities, beverages, food and metals.

  2. In our literature review, Newbold and Vougas (1996) is the only paper that also tested the null hypothesis of stationarity, which is the testing strategy adopted in our paper. However, they do not study individual commodity price indices, nor account for structural breaks.

  3. Powell (1991) refers to the effects of breaks on the critical values of the Engle-Granger test, but there is no mention of their effect for the Johansen test.

  4. Singer (1999), however, argues that “ ... it does not matter very much whether the data are interpreted as a persistent decline trend or as essentially stationary with intermittent downward breaks. ” (p. 911).

  5. Carrión-i-Silvestre et al. (2005) study the case of testing for panel stationarity with multiple structural breaks. However, they only consider the models formulated in Eqs. 3 and 6.

  6. Notice that in practice the models in Eqs. 1 and 2 are estimated only once, since they do not include the dummy variables D it and DT it .

  7. See Pfaffenzeller et al. (2007) for practical advice on how to update the GY commodity price indices, as well as for a full description of the data series and their sources.

  8. Bai and Perron (1998) provide a framework for estimating and testing linear regression models with multiple structural breaks that occur at unknown dates. However, the Bai–Perron methodology is not implemented here because it does not permit the use of trending regressors, which is of particular relevance when assessing the validity of the PS hypothesis.

  9. León and Soto (1997), Kellard and Wohar (2006), Ghoshray (2011) and Hadri (2010) report plots of the commodity price series, but not of the (broken) trend components that are estimated.

  10. Seong et al. (2006) recommend using impulse response functions to estimate the half-life of a shock. The traditional formula to estimate the half-life of a shock \(-(\ln \left( 2\right) \div \ln \left( \delta \right) )\), where δ refers to the value of the autoregressive parameter, is only applicable in the case of simple AR(1) models.

  11. The Akaike information criterion also selects the same optimal lag order.

  12. Collier and Gunning (1999) indicate that in a sample of 19 positive shocks, in two out of three cases the duration is about 3–8 years.

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Authors and Affiliations

  1. Unidad de Investigaciones, Banco de la República, Carrera 7 # 14-78. Piso 11, Bogotá, Colombia

    Ana María Iregui

  2. Facultad de Economía, Universidad del Rosario, Calle 12C # 4-69, Bogotá, Colombia

    Jesús Otero

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  1. Ana María Iregui
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  2. Jesús Otero
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Correspondence to Jesús Otero.

Additional information

This paper was started while Jesús Otero was a Visiting Scholar in the World Institute for Development Economics Research (WIDER) of the United Nations University (UNU) in Helsinki. Jesús Otero would like to express his gratitude to UNU-WIDER for providing a welcoming and supportive environment for this research. Its financial support is also gratefully acknowledged. We thank Stephan Pfaffenzeller who kindly updated and provided the dataset used in the paper. We also thank Imed Drine, Monica Giulietti, James Thurlow, an anonymous referee and seminar participants at UNU-WIDER for their comments and suggestions. The opinions expressed herein are those of the authors and do not necessarily reflect the views of the Banco de la República or its Board of Directors.

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Iregui, A.M., Otero, J. The long-run behaviour of the terms of trade between primary commodities and manufactures: a panel data approach. Port Econ J 12, 35–56 (2013). https://doi.org/10.1007/s10258-012-0086-3

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