Structural Change and Moderating Growth in the People's Republic of China by Asian Development Bank;

Author:Asian Development Bank;
Language: eng
Format: epub
Publisher: Asian Development Bank Institute
Published: 2016-08-15T00:00:00+00:00

Source: Ghoshray and Pundit 2016.

Besides economic activity, exchange rates are included as an important determinant of commodity demand. Since global commodity prices are priced in US dollars, a fall in dollar value is a shift in relative prices that would lead to increased demand for commodities, leading to an increase in commodity prices. Another important determinant included here is interest rates. An increase in interest rates leads to an increase in storage costs, which leads to a reduction in commodity demand and, thereby, lowers commodity prices. However, it is also possible that investment in extraction falls after an increase in interest rates, leading to a decrease in future supply that, in turn, exerts upward pressure on commodity prices.10

Given the importance of structural breaks in commodity prices, unit root tests that allow for Flexible Fourier Form are carried out. The results of the test statistics show that the null hypothesis of a unit root for all variables, except nickel, can be rejected. In addition, using a model selection criterion (i.e., Akaike Information Criterion), in all cases the Flexible Fourier Form VAR model outperforms the linear VAR, which motivates this methodology.

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