How important are common factors in driving non-fuel commodity prices? A dynamic factor analysis

This paper analyses the importance of common factors in shaping non-fuel commodityprice movements for the period 1957-2008. For this purpose, a dynamic factor modelis estimated using Kalman Filtering techniques. Based on this set-up we are able toseparate common and idiosyncratic developments of commodity prices. Our estimationresults show that there exists one common significant factor for most non-fuelcommodity prices and that this common factor has recently become increasinglyimportant in driving non-fuel commodity prices. However during the seventies andearly eighties, the co-movement was much higher. In a next step, we then rely on aninstrumental variable approach to uncover which variables could be linked to thecommon factor. We find...