Correlation Studies Between Commodity Cycle And Business Cycle:Empirical Evidence From Metal Price And China’s Economic Growth

Economists and financial analysts have a long standing interest in studying trends and cycles in various macroeconomic and financial variables. Both very short cycles and very long cycles have been considered, as has every length of cycle in between:seasonal fluctuations, business cycles (6-32quarters), lesser known Kitchin inventory cycles of3-5years and Juglar fixed-investment cycles of8-11years, Kuznets cycles of15-25years, Bronson asset allocation cycles of roughly30years, and Kondratieff waves or cycles of length50-60years.While in specific to research on commodities, commodity prices around short to medium-term also tend to reflect the cyclical fluctuations and recurrent instability characteristics, particularly on commodities which are closely related to the macroeconomic cycles. The U.S. National Bureau of Economic Research (NBER) in early years has conducted a series of cyclical research on commodity prices include agricultural products, minerals and raw materials. Some scholars have applied empirical tests of relationship between commodity prices and economic cycles. Besides, recent studies have examined the correlation between commodity prices and business cycle.Metal prices have undergone substantial fluctuation with the recent commodity boom and global financial crisis, which have revealed some special characteristics of cyclical change and correlations between themselves and growth-rate cycle under China’s transitional economy. For contemporary China, stable macroeconomic counter-cyclical policies must be prescribed based on depth research and reliable estimate of important commodity prices, which accordingly calls for more the rapid rise to a decline in cyclical of the on the basis of its theoretical and empirical researches.From a theoretical perspective through short and medium-term movement study on commodity prices, this paper first explains how the metal prices have reflected cyclical fluctuations under the combined influences from supply, demand, financial, co-movement and other macroeconomic factors. In reverse, the bulk of metal price cycles reflect business cycle. Based on analysis above, this paper demonstrates that cyclical fluctuations of metals include gold, copper, aluminum and zinc are closely related to China’s macroeconomic cycles.Business Cycle Theory and its measurement form the theoretical and empirical basis of this paper. Combined with the existing achievements of the past commodity price volatility research, this paper has applied CF filtering method according to time series spectral analysis theory of single variable to extract the spot price cyclical fluctuation components of copper, aluminum, zinc and gold. This paper also introduces Bry-Boschan algorithm based on the international gold, copper, aluminum and zinc price data to judge the turning point of each commodity cycle, thus identifies phases of certain commodity "Kitchin Cycles" from1992to2011.Unlike existing domestic arguments that only discuss the theoretical point of commodity price cyclical features, this paper adopts duration dependence theory after the precise measurement of cycle durations, and using the Weibull distribution function to test whether duration dependence of the target cycles to terminate or not. And to some extent, the paper further tests whether this dependence can be used to measure cycles, and thus serve as evidence of the existence of single metal price "Kitchin cycle" throughout this article.To study the correlation between metal cycles and economic cycle in China, the paper first estimates the relationship between the observation prices at the same time. After adopting time difference correlation coefficient index and the Granger causality test, the author uses empirical methods and real price data to analysis mutual relations and co-mobility between different commodity price and China’s macro-economic growth rate cycles from the perspective of time synchronization and causality argument. It concludes that international gold, copper, aluminum and zinc price cycles lead China’s economic cyclical fluctuations for about1.75to2.25years.Finally, conclusions and suggestions are presented for policy-makers who wish to avoid agricultural commodity price risks and improve metal price early warning systems.