**Policy, Research, and Extemal** Affairs **Intemnatonal Commodity Merkt**

- This paper a product of the Intemational Commodity Markets Division, Intemational Economics - Department is part of a larger effort in PRE to develop an understanding of the formation of primary commodity prices, in particular their response to changes in macroeconomic variables. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Sarah Lipscomb, room S7-062, extension 33718 (67 pages with figures and tables).

Ghura analyzed the immediate, delayed, and group responses of 20 commodity prices in four commodity groups (foods and livestock, crops, energy, and metals) to macroeconomic "news" (unexpected announcements) in the United States between 1985 and 1989. He found that: Macroeconomic news generally affects commodities within groups in the same direction - but there is no clear evidence that the prices of largely unrelated commodity groups react in the same way to macroeconomic shocks.

News about inflation indices and the money supply did not have a major effect on commodity pnces.

The business cycle must be carefully considered in analyzing the impact of macroeconomic news on commodity prices. Over the long haul, news about macroeconomic variables was - unimportant but many commodities reacted significantly to news when the economy was coming out of a local recession (October I to December 31, 1987). When indices of real activity were sending out "noisy" signals, most commodities did not respond significantly to news.

During the recession, unexpected movements in exchange rates appeared to affect the behavior of metal prices, both immediately and after a delay.

tion, while prices on most energy products and aU crops appreciated. Most of the significant inmmediate impacts of exchange rate shocks were positive.

It was a different story with the one-daylagged effect of exchange rate shocks. The delayed effect was positive for metals, foods and livestock, crops and oilseeds, but negative for energy products.

The significant immediate impact of interest rate shocks was positive, as expected. The oneday-lagged effect was negative, except for metals, for which it was positive.

News about real activity was important, especially during the local recession. Several commodities were sluggish in their reaction to such news, however. Most crops and energy products reacted with a one-day lag - but the response of soybeans, soybean products, and wheat was positive and the response of energy products was negative.

[Method: Ghura used survey data to measure the effect of news about macroeconomic variables that are announced periodically (money stock, inflation, and indices of real activity). He used autoregressions to measure shocks to commodity markets for variables (exchange rates and interest rates) whose values are realized on financial and credit markets.] The prices of metals and foods and livestock commodities fell after exchange rate appreciaThe PRE Working Paper Series disseminates the findings of work under way in the Bank's Policy, Research, and External Affairs Complex. An objective of the series is to get uhese findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank.

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