January 2011
Abstract
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
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
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HT: Real Time Economics
