MACROECONOMIC ASPECTS OF COMMODITY PRICE DYNAMICS

Author

Md Rafayet Alam, Southern Illinois University CarbondaleFollow

Date of Award

5-1-2016

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Gilbert, Scott

Second Advisor

Morshed, AKM Mahbub

Abstract

Fluctuation in commodity prices is a significant and timely issue to be studied. My first chapter examines the impact of monetary policy and other macroeconomic shocks on the dynamics of agricultural commodity prices. The major contributions of this study are twofold. First, unlike other studies that use indexes, this study analyzes the commodities individually, affording the inclusion of commodity-specific fundamentals such as the level of inventory -- an important determinant of commodity price -- in a structural VAR framework. Second, it exploits a rich dataset of agricultural commodity prices which includes commodities that are usually overlooked in the literature, and extracts a common factor using the dynamic factor model to understand the extent of co-movement of the prices and to gauge the extent to which macroeconomic shocks drive the ‘co-movement’ in a factor-augmented VAR (FAVAR) framework. The findings show that monetary policy, global economic conditions and the US dollar exchange rates play an important role in the dynamics of agricultural commodity prices. My second chapter examines the role played by Wal-Mart in price convergence among US cities. Despite the fact that market structure is an important determinant of price convergence and that US retail architecture has been changed over the past two decades by the expansion of big box stores and supercenters, the role played by such rapidly-expanding ‘big-box’ chain-stores like Wal-Mart in price convergence is completely over-looked in the literature. The possible symmetry in costs and mark-up among Wal-Mart stores, and their influence over the city level prices motivate us to test if their presence helps price convergence among US cities. After controlling for distance, local costs such as wage and rent, and city and time specific fixed effects this study finds that prices are significantly closer in two cities if they have Wal-Mart than if none or only one of them has Wal-Mart. Though the results are mostly robust to the analysis using disaggregate price data and sub-samples, they are more pronounced for grocery items than non-grocery items, within high income cities than low income cities. Moreover, our regional analysis uncovers the regional variations in the effect of Wal-Mart on price convergence, and Wal-Mart’s more prominent role in inter-region rather than intra-region price convergence. Since the presence of Wal-Mart accelerates the rate of price convergence and thus reduces the potential for misallocation of resources, our results suggest that the existence of a positive welfare impact of Wal-Mart cannot be overruled. My third chapter uses county level data to see the effect of Wal-Mart on local economic activities and revenue in Florida. The OLS estimation shows that the presence of Wal-Mart significantly increases total retail sales and decreases sales tax rate, but have no significant effect on total taxable retail sales and total revenue from sales tax. The instrumental variable (IV) estimation shows that presence of Wal-Mart significantly decreases sales tax rate but has no significant effect on total retail sales, total taxable retail sales and total revenue from sales tax. Thus, according to our analysis, Wal-Mart does not necessarily increase local economic activities and tax revenue. However, interestingly, Wal-Mart is found to play an important role in decreasing local sales-tax rate.