The Economics of Commodity Markets

7

Cointegration with Industrial Production and Inflation

This chapter deals with the inter-relationships between commodity markets and two major constituents of macroeconomic variables: (i) industrial production (as a proxy of economic activity) and (ii) inflation. These key indicators are being followed closely by analysts and market professionals, as detailed previously in Part II.

In what follows, we shall first explore the usual descriptive statistics and unit root tests of the dataset, and then develop two kinds of cointegration analyses between commodities on the one hand, and industrial production or inflation on the other hand. Then, we briefly conclude with the main results that have been achieved by following this standardized econometric procedure.

7.1 DATASET AND UNIT ROOT TEST RESULTS

Table 7.1 provides the descriptive statistics of the time series used in Chapter 7. To facilitate the exposition, we rely on the GSCI sub-indices to carry out our analysis, instead of the individual commodity price series. We use mainly industrial production and inflation indices from the USA, China (CH), Brazil (BR), Australia (AU), Canada (CA), the EU and Germany (GE). Other monetary aggregates include US M2 and the OECD inflation index. All the data used in this chapter comes from Bloomberg with monthly frequency (due to the availability of macroeconomic time series at monthly frequency at best).

Table 7.1 Descriptive statistics for the GSCI sub-indices, industrial production, monetary ...