Dating common commodity price and inflation shocks with alternative approaches

Abstract

This paper investigates the occurrence of common price shocks (co-exceedance) across different commodities. IMF monthly price series of 11 commodities are considered over the 1980-2021 period. The analysis considers two alternative stochastic processes. The first looks for common volatility clusters using individual GARCH models to detect whether and when respective clusters overlap. Through an appropriate battery of tests, the second alternative looks for a common Bubble Generating Process (BGP) by searching for individual explosive roots and then dating them to identify the possible overlaps and first movers. Evidence emerging about these shock generating processes is linked to the analogous behaviour of the US Consumer Price Index (CPI) to assess to what extent inflation shocks can be associated to the observed commodity price spikes. Results show that the detection of temporary bubbles and volatility clusters only partially agrees on the episodes of exuberance, on the first-moving commodities and on the involvement of the CPI. This provides helpful suggestions on the development of a real-time surveillance tool supporting policy intervention in periods of commodity price turbulence.