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This paper studies commodity price cycles and their underlying drivers using a dynamic factor model. The study employs a sample of 39 monthly commodity prices over 1970:01 to 2019:12. The analysis identifies global and group-specific cycles in commodity markets and includes them in a structural vector autoregressive model together with measures of global economic activity and global inflation, to disentangle their response to global demand, global supply, and commodity market-specific shocks. The findings reveal the following main results. (i) There exists a global cycle in commodity markets that accounts for an increasing fraction of co-movement in commodity prices over the past two decades, particularly for energy, metals, and precious metals. (ii) The results are heterogeneous across groups of commodities, with group-specific commodity cycles existing for grains and precious metals over the full sample period, 1970-2019. Metal and energy prices exhibit within-group synchronization over 1970-99; however, in recent years, their movements have become increasingly aligned with the global business cycle. (iii) Since 2000, the global commodity cycle is largely driven by global supply shocks, such as rapid productivity growth in emerging markets and developing economies, which increase demand for commodities. (iv) The large price spikes observed during the two most prominent commodity market boom-bust episodes of the past half-century (1972-74 and 2006-08) are driven additionally by shocks that are orthogonal to global economic activity such as shifts in speculative demand for commodities.

Terms of trade. --- Prices.

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Capital investments --- Terms of trade --- Mathematical models.

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Balance of payments --- Terms of trade --- Developing countries --- Economic policy.

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How firms react to a given shock may depend on the degree to which rivals are present and on whether potentially viable entrants to that market exist. A preferred supplier market presence and threat of entry lessen a nonmember country's price reaction to most-favored-nation trade liberalization and increase its price reaction to preferential trade liberalization.

Competition, International. --- International trade. --- Regionalism. --- Terms of trade.

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"Gabon is currently one of the richest countries in Sub-Saharan Africa, having a GDP per capita of close to USD 4,000, and is characterized by a stable political climate and rich forestry and mineral resources, as well as a small population. Oil is the key economic sector, accounting for half of GDP and more than two-thirds of revenue. Discovered in the 1970s, oil windfalls have delivered spectacular wealth and financed public expenditure over two decades. However, the oil boom has led to the Dutch disease and the shrinkage of the industrial and agricultural sectors of the economy due to the appreciation of the exchange rate and the movement of capital to the oil sector. But with output projections suggesting that oil will be depleted within the next 10 to 15 years, there are growing pressures on the policymakers to take actions to diversify production. While Gabons membership in the Central African economic and monetary union means that it benefits from the macroeconomic stability from a common external trade and fixed exchange rate regime pegged to the euro, it relinquishes independence in the policy response to shocks. An analysis using a quantitative methodology to decompose responses to shocks shows that Gabons adjustment to adverse movements in the terms and trade from 1980 to 2000 was considerably weak in terms of three performance indicators import intensity, economic compression, and nonoil export promotion. While the economys growth rate was respectable, Gabonese policymakers postponed adjustment by resorting to considerable borrowing during this period. While there was some decrease in import intensity from 1987 to 1990 and 1996 to 2000, as well as slight nonoil export diversification from 1996 to 2000, the government borrowed from commercial banks and donors, causing its external debt/GDP ratio to increase from 30 percent of GDP in 1970-76 to 80 percent in 1999. To pay the debt service, it currently has to maintain large primary surpluses. Only since 1996 has there been significant fiscal retrenchment and a freezing of government wages. This paper a product of Poverty Reduction and Economic Management 3, Africa Technical Families is part of a larger effort in the Bank to study the macroeconomic management of volatility"--World Bank web site.

Petroleum industry and trade --- Terms of trade --- Gabon --- Economic policy.