Investigation into the dynamic relationships between global economic uncertainty and price volatilities of commodities, raw materials, and energy

Abstract

Purpose – This paper aims to deepen the understanding of the relationship between global economic uncertainty and price volatility, specifically focusing on commodity, industrial materials and energy price indices as proxies for global inflation, analyzing data from 1997 to 2020. Design/methodology/approach – The dynamic conditional correlation generalized autoregressive conditional heteroscedasticity model is used to study the dynamic relationship between variables over a while. Findings – The results demonstrated a positive relationship between commodity prices and the global economic policy uncertainty (GEPU). Except for 1999–2000 and 2006–2008, the results of the energy price index model were very similar to those of the commodity price index. A predominant positive relationship is observed focusing on the connection between GEPU and the industrial material price index. The results of the pairwise Granger causality reveal a unidirectional relationship between the GEPU – the Global Commodity Price Index – and the GEPU – the Global Industrial Material Price Index. However, there is bidirectional causality between the GEPU – the Global Energy Price Index. In sum, changes in price indices can be driven by GEPU as a political factor indicating unfavorable economic conditions. Originality/value – This paper provides a deeper understanding of the role of global uncertainty in the global inflation process. It fills the gap in the literature by empirically investigating the dynamic movements of global uncertainty and the three most important groups of prices.

Keywords

• Global economic policy uncertainty
• Commodity prices
• Industrial raw materials prices
• Energy prices
• DCC-GARCH model
• Granger causality