Long-Run Commodity Prices, Economic Growth, and Interest Rates: 17th Century to the Present Day

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, while 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. Moreover, commodity price movements have an asymmetric country effect on economic activity; periods of falling commodity prices will support GDP growth for commodity importers like the US but depress growth for commodity exporters such as Chile.