COMMODITY PRICES - CYCLICAL WEAKNESS OR SECULAR DECLINE

Primary commodities still account for the bulk of exports in many deve loping countries. However, real commodity prices have been declining a lmost continuously since the early 1980s. The appropriate policy respo nse to a terms of trade shock depends importantly on whether the shock is perceived to be temporary or permanent. Our results indicate that the recent weakness in commodity prices is mostly secular, stressing t he need for commodity exporting countries to concentrate on export div ersification and other structural policies. There is, however, scope f or stabilization funds and the use of hedging strategies, since the ev idence also suggests commodity prices have become more volatile.