Effects of supply and demand disturbances on real commodity prices: the US, UK and Japanese experience

Abstract

Using forty-one years of monthly data, this paper assesses the impact of economy-wide supply and demand shocks on commodity prices in three of the world?s major economies. Utilising a small theoretical macro model, empirical results support the hypothesis that the relationship between real commodity prices and inflation can be either positive or negative depending on the relative importance of supply and demand shocks in the national economy. Our results also show that differences occur across economies with the UK commodity returns registering more sensitivity to demand shocks than those of US and Japanese markets. Supply and demand components of commodity prices have also varied over time and across economies, suggesting that commodity markets are not fully globally integrated but are highly sensitive to national influences.