The Model of Commodity Prices after Sir Arthur Lewis Revisited

This paper builds on the work of Deaton and Laroque (2003) by formulating a nonlinear model of commodity prices. The paper makes three distinct contributions. First, a nonlinear model is constructed that explains long-run dynamics of commodity price behavior; secondly, more recent data is employed by updating the price, income and production indices; and finally advanced econometric techniques are adopted in order to investigate whether there is empirical evidence to support the theoretical underpinnings of the nonlinear model. Higher power tests broadly reverse the empirical findings of Deaton and Laroque’s (2003) model of commodity prices, lending support to the underlying theory proposed in this paper. Tests for cointegration provide evidence that the long-run relationship between world commodity production and world income for key commodities such as sugar, copper, and tin may be better explained by non-linear behavior.