A long-commodity-cycle model of the world economy over a century and a half — Making bricks with little straw

• Published in: Energy economics Vol. 81; pp. 503 - 518
• Main Authors: Le, Vo Phuong Mai, Meenagh, David, Minford, Patrick
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier B.V 01.06.2019; Elsevier Science Ltd
• Subjects: Business cycles; Commodities; Commodity prices; Constraint modelling; DSGE model; Energy economics; Gestation; Global economy; Indirect Inference; Long cycles; Long waves; Prices; Pricing; Straw; Indirect Inference; E52; Long waves; DSGE model; E10; E32; Commodities
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2019.04.011

This paper explores the world business cycle using unfiltered data from 1870 and looks for a theory that could account for the long wave commodity cycle in the world economy. We build a simple DSGE model that includes a long time-to-build constraint in the commodity sector. We find that this model can produce long cycles in output and commodity prices as introduced by Kontradieff (1925) and Schumpeter (1934). Our findings show that these long business cycles are produced by the long gestation of commodity capacity which causes very large swings in commodity prices. •We introduce a theory to explain the long wave commodity cycle in the world economy.•A simple DSGE model includes a long time-to-build constraint in the commodity sector.•The model is estimated using non-stationary data using Indirect Inference.•The model can produce long cycles in output and commodity prices found in the data.•We find a significant role for the long-gestation in the commodity sector.