How to Measure Global Real Economic Activity when Modeling Commodity Prices
By Lutz Kilian, Ph.D., Professor of Economics, University of Michigan, Ann Arbor and Member of the JPMCC’s Research Council and Xiaoqing Zhou, Ph.D., Senior Economist, Bank of Canada
In modeling industrial commodity markets, this paper argues that changes in the volume of shipping of industrial raw materials are a better proxy for global real activity than changes in the overall real output of the global economy because they more accurately capture the timing and magnitude of shifts in demand. In contrast, in modeling food commodities such as wheat, corn, or rice, the article notes that a case can be made that demand depends on global real income, making world real GDP a potentially more suitable measure of global real economic activity.
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