Should Investors Worry About Commodity Shocks?

Abstract

In this paper, I investigate which commodity disturbances are significant in regards to a country’s business cycle. I develop a Small Open New Keynesian model that is estimated for twenty-three countries using nineteen primary commodities within the energy, metal, timber, rubber, cotton and food sectors. The findings show that petroleum shocks are the only commodity shocks that are significant in affecting a country’s output. Also, a country’s openness plays an important role in shaping the output response initiated by a petroleum shock. In addition, disturbances caused by petroleum shocks dissipate within six to ten quarters.