Analyzing Commodity Prices in the Context of COVID-19, High Inflation, and the Ukrainian War: An Interview with James Hamilton.

• Author: Jawadi, Fredj

1. BACKGROUND AND INTRODUCTION

   James (Jim) D. Hamilton has been a professor in the Economics Department at the University of California, San Diego since 1992, where he currently holds the Robert F. Engle endowed chair in Economics. He served as department chair from 1999-2002, and has also taught at Harvard University and the University of Virginia. He earned a Ph.D. in Economics from the University of California, Berkeley, in 1983. Professor Hamilton has published on a wide range of topics. His research in areas that include econometrics, business cycles, monetary policy, and energy markets (Hamilton, 1983; 1996, 2003, 2009, etc.) has gained him over 81,923 citations. His graduate textbook on time series analysis has sold over 50,000 copies to date and has been translated into Chinese, Japanese, and Italian. He also contributes to Econbrowser, a popular economics blog. Academic honors include Research Associate with the National Bureau of Economic Research, Best Paper Award for 2010-2011 from the International Institute of Forecasters, and the 2014 award for Outstanding Contributions to the Profession from the International Association for Energy Economics. He is a Fellow of the Econometric Society and the Journal of Econometrics, and a Founding Fellow of the International Association for Applied Econometrics. He has been a visiting scholar at the Federal Reserve Board in Washington, DC, as well as the Federal Reserve Banks of Atlanta, Boston, New York, Philadelphia, Richmond, and San Francisco. He has also been a consultant to the National Academy of Sciences, the Commodity Futures Trading Commission, and the European Central Bank, and has testified before the United States Congress. Professor Hamilton has received six teaching awards from the UCSD Economics Department.

   The main focus of our interview is on James Hamilton's work in the field of energy economics and the macroeconomy. The aim is to improve our understanding of the drivers of commodity price dynamics during the COVID-19 pandemic and the impact on the macroeconomy, not only in the past, but also more recently during the COVID-19 and the Ukrainian war. Jim was the plenary speaker at the 6th International Workshop on Financial Markets and Nonlinear Dynamics (Paris, June 2-3, 2022), and he was kind enough to agree to this interview.

   We hope that this interview will provide you with further insights into the recent dynamics of commodity prices and their impact on the real economy.

   The interview is organized into five sections. The second section deals with issues covering commodity price dynamics in the context of COVID-19. Section 3 focuses on commodity price changes and geopolitical tension. Topics related to the macroeconomy-commodity price relationship are discussed in section 4. Finally, section 5 concludes with some projections about commodity prices in the future.

2. COMMODITY PRICE DYNAMICS IN TIMES OF COVID-19

   Fredj: Q1. What are your views on the present levels of commodity prices, especially oil and gas?

   Jim: The price of oil nearly tripled between June 2020 and March 2022, and more than tripled if you mark the change from the ridiculously low prices of April 2020. That definitely puts this most recent episode in the same class as the big historical oil shocks that have received a lot of study. And it's mirrored to some degree in commodity prices more broadly. For example, the price of copper nearly doubled over that period.

   Fredj: Q2. Commodity prices displayed high volatility during the COVID-19 outbreak and even in the post-COVID-19 period. Is there a linkage between COVID-19 and the volatility of commodity prices?

   Jim: Oh, Absolutely. COVID brought much economic activity to a virtual standstill. People weren't driving to work, they didn't want to fly. This might have been the biggest short-run shock to demand that we've ever seen.

   Fredj: Q3. What mechanisms explain the interaction between commodity markets and coronavirus? Can we talk about three shocks: a policy shock, a demand side shock, a supply side shock?

   Jim: There were certainly disruptions to both supply and demand, but I would emphasize demand as the initial factor. There was supply from inventory that people weren't buying. And the demand shock in turn was heavily influenced by policy, as you mentioned, namely the mandated lockdowns. But later on it turned out very much to be a story about supply. The crazy low prices caused a lot of producers to go out of business, and those that remained were much more cautious about putting money back and investment into the business. The U.S. still has not recovered today the level of production that we were seeing pre-COVID. That is 100% an issue of supply, not demand.

   Fredj: Q4...