Primary Commodity Prices: Economic Models and Policy.

• Author: Weiss, Christoph R.

The growing concern with commodity price volatility is observable both in the industrial countries, as well as in the less developed world. For the latter, primary products are an important source of export earnings and as LDC's typically dependent on the exports of just one or two commodities, fluctuations in the prices of these goods are seen as damaging to the development process. The industrial countries, on the other hand, produce primaries as well and seek to protect their domestic producers from fluctuations, especially in agriculture. The strongest impetus however to the industrial world in favor of commodity market stabilization stems from the experiences of high inflation rates and recession as a consequence of the runup of commodity prices in 1973-74. The 1980s have reinforced the interest in this topic because of the sharp increase of commodity price volatility during this period.

This book reports the proceedings of an international conference on primary commodity price determination which was held in London during March 1989. Despite the editors introduction, nine papers accompanied by discussants' comments illustrate the current state of the art in commodity economics both, on a theoretical as well as empirical level.

Part 1, which is devoted to econometric aspects as well as the practical importance of modelling forward-looking behaviour, starts with a paper by Maddala, who suggests methods to incorporate rational expectations into commodity models. In his paper, which is essentially a review of parts of Maddala's earlier work, the author stresses the importance of incorporating policy-induced market disequilibrium (due to price supports) for the estimation of supply elasticities.

Maddala's paper could also form the basis for criticizing the following empirical analysis by Gilbert and Palaskas who do not incorporate known institutional features into their applied work. The authors concentrate on the question of the extent to which there is evidence of forward looking behaviour as well as the significance of financial market influences (changes in the interest rates) on price determination. Forward looking behavior would imply a degree of automatic price stabilization. However, their empirical results only gives limited support for the first effect and in none of the six commodities analyzed did they find a significant interest rate effect. However, confronting these results with related empirical investigations in the area...