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Long-run commodity prices, economic growth and interest rates: 17th century to the present day

Harvey, David I.; Kellard, Neil M.; Madsen, Jakob B.; Wohar, Mark E.


Neil M. Kellard

Jakob B. Madsen

Mark E. Wohar


A significant proportion of the trade basket of many developing countries is comprised of primary commodities. This implies relative price movements in commodities may have important consequences for economic growth and poverty reduction. Taking a long-run perspective, we examine the historical relation between a new aggregate index of commodity prices, economic activity and interest rates. Initial empirical tests show that commodity prices present a downward trend with breaks over the entire industrial age, providing clear support for the Prebisch-Singer hypothesis. It would also appear that this trend has declined at a faster rate since the 1870s. Conversely, several GDP series such as World, Chile, China, UK and US, trend upwards with breaks. Such trending behaviour in both commodity prices and economic activity suggests a latent common factor like technological innovation.

To assess the relationships between economic series, we apply a stationary VAR (Vector Autoregression) to model movements around trends. Strikingly, there is evidence that commodity prices Granger cause income and interest rates, whilst interest rates Granger cause commodity prices. From these results and the related impulse response function analysis, the historical perspective provides some useful information for contemporary policy makers. For example, loose monetary policy has tended to support higher commodity prices. More-over, commodity price movements have an asymmetric country effect on economic activity; periods of falling commodity prices will support GDP growth for com-modity importers like the US but depress growth for commodity exporters such as Chile.


Harvey, D. I., Kellard, N. M., Madsen, J. B., & Wohar, M. E. (in press). Long-run commodity prices, economic growth and interest rates: 17th century to the present day. World Development, 89,

Journal Article Type Article
Acceptance Date Jul 15, 2016
Online Publication Date Sep 7, 2016
Deposit Date Sep 7, 2016
Publicly Available Date Sep 8, 2018
Journal World Development
Print ISSN 0305-750X
Electronic ISSN 0305-750X
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 89
Keywords Primary commodities; Prebisch-Singer hypothesis; Economic growth; Interest rates; Structural breaks; VAR.
Public URL
Publisher URL


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