Commodity Price Volatility and the Sources of Growth

38 Pages Posted: 31 May 2011 Last revised: 18 Jan 2012

See all articles by Tiago Cavalcanti

Tiago Cavalcanti

University of Cambridge

Kamiar Mohaddes

University of Cambridge - Judge Business School; University of Cambridge - King's College, Cambridge

Mehdi Raissi

International Monetary Fund (IMF) - Fiscal Affairs Department

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Date Written: January 17, 2012

Abstract

This paper studies the impact of the level and volatility of the commodity terms of trade on economic growth, as well as on the three main growth channels: total factor productivity, physical capital accumulation, and human capital acquisition. We use the standard system GMM approach as well as a cross-sectionally augmented version of the pooled mean group (CPMG) methodology of Pesaran et al. (1999) for estimation. The latter takes account of cross-country heterogeneity and cross-sectional dependence, while the former controls for biases associated with simultaneity and unobserved country-specific effects. Using both annual data for 1970--2007 and five-year non-overlapping observations, we find that while commodity terms of trade growth enhances real output per capita, volatility exerts a negative impact on economic growth operating mainly through lower accumulation of physical capital. Our results indicate that the negative growth effects of commodity terms of trade volatility offset the positive impact of commodity booms; and export diversification of primary commodity abundant countries contribute to faster growth. Therefore, we argue that volatility, rather than abundance per se, drives the "resource curse" paradox.

Keywords: Growth models, resource curse, commodity prices, volatility

JEL Classification: C23, F43, O13, O40

Suggested Citation

Cavalcanti, Tiago and Mohaddes, Kamiar and Raissi, Mehdi, Commodity Price Volatility and the Sources of Growth (January 17, 2012). Available at SSRN: https://ssrn.com/abstract=1846429 or http://dx.doi.org/10.2139/ssrn.1846429

Tiago Cavalcanti

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Kamiar Mohaddes (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

University of Cambridge - King's College, Cambridge ( email )

King's Parade
Cambridge, CB2 1ST
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

Mehdi Raissi

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

HOME PAGE: http://https://sites.google.com/site/mehdiraissi/

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