, harvard kennedy school, february 2010. this, obviously, is not an accurate characterization of countries like canada, australia, new zealand, and norway. nevertheless, canada and all other commodity - based countries are subject to serious economic challenges, linked primarily to the extreme volatility of commodity prices. the long and short of price volatility some countries are large enough commodity producers ( or consumers ) that their actions can materially influence global commodity prices. saudi arabia might be an example. but these are certainly the exception. for the most part, commodity producers are price - takers. they sell a fairly homogeneous product in a highly competitive market, and their actions have little effect on the price that they receive. unfortunately, for countries like canada and provinces like alberta, these prices are typically volatile, and highly uncertain. this volatility is caused, in large part, by the unusual nature of the short - run demand and supply curves associated with most commodity markets. the products that commodity - based economies sell typically have extremely low short - run demand elasticities ( i. e., demand is not very responsive to price changes. ) supply is similarly inelastic, since it often takes time to bring new production online if prices suddenly rise, or to reduce production if prices suddenly drop. 3 any move in either of these curves, therefore, is likely to lead to outsized changes in global prices. this erratic behaviour is evident in the movement of most commodity prices through time. commodity prices are typically much more volatile than those of other goods or services – and one of the most volatile commodity prices of all is that of oil. this is bad news for energy producers, and clearly complicates the task of planning and investment. oil and natural gas now account for the majority of canada ’ s commodity production. some commodities are also subject to frequent supply disruptions that accentuate price volatility. another important feature worth noting is that the long - run demand and supply elasticities for most commodities are typically much higher. if commodity prices remain high, consumers find ways to economize on their use, or find substitute products. new supplies also gradually come online. all of these factors work to push prices lower. in this sense, there is a selfcorrecting mechanism at play. indeed, over the very long run – and here, i am referring to decades – the average real price of most commodities has been surprisingly stable. 4 economists refer to this as “ mean reversion

. the second problem is manipulation, the stuff of most of the headlines. the focus has been on libor survey responses at some individual firms being biased, with a view to profiting on trading positions. of course, to the extent that this kind of misrepresentation occurred, it is criminal behaviour and the authorities have been treating it as such. foreign exchange fixes now let me move to foreign exchange benchmarks. foreign exchange benchmarks are typically calculated from actual spot trades over a short predetermined time period ( or “ window ” ) each day. it has been alleged that foreign exchange traders at some large financial institutions exchanged information about their clients ’ orders with a view to positioning themselves advantageously in the market. the suspicion of such collusion – as suggested by some emails and chat - room discussions that have come to light – is being taken very seriously. the existence of collusion cannot be inferred, though, from the volume of trading during the fixing window. banks may want to execute many of their own trades during the fixing window, for instance, because their customers want to transact at the fixing price, and banks therefore look to offset those positions around the fix so as to manage their market risk. issues relating to how fixes are designed, and how they are used by banks and their customers, are now being examined by global authorities. what should be done? to address some of the problems associated with benchmarks, two options present themselves : reform or replacement. we can reform existing benchmarks to strengthen governance and enforce procedures that provide adequate checks against conflicts of interest and collusion. or, we can replace them with more robust alternative benchmarks. in bis central bankers ’ speeches fact, it is likely that neither of these solutions will be sufficient by itself. we will need to do some of both. reforming benchmarks the first step in reforming benchmarks is clarifying governance. who has direct responsibility for setting those benchmarks and assuring their integrity? what kind of governance exists within the financial institutions that determine the benchmarks? and who oversees those processes to make sure that the safeguards are appropriate? last summer a group of financial market regulators from around the world, the international organization of securities commissions ( iosco ), released its principles for financial benchmarks – a set of best practices aimed at answering these questions. these principles outline a framework for the governance and administration of financial benchmarks, including the roles, responsibilities and internal controls required of a benchmark ’