Global Development Institute

The close relationship between commodity future and cash prices is critical for the effectiveness of risk management and the functioning of price discovery. However, in recent years, commodity futures prices, across the board, have appeared increasingly detached from prices on physical markets. This paper argues that while various factors, identified in previous literature, which introduced limits to arbitrage have facilitated non-convergence, the actual extent of non-convergence in these markets is caused by essential differences in the mechanisms of price formation on physical and derivative markets. With reference to the particular case of the CBOT wheat market, the paper shows that the size of the spread between futures and cash prices can be theoretically and empirically linked to the increasing inflow of financial investment into commodity futures markets.

Sustained investment in productive capabilities and fixed-capital formation is a key driver of inclusive and sustainable structural transformation. Both historically and compared to other middle-income countries, South Africa has performed poorly in terms of sustaining domestic-productive investments. This failing has coexisted with the development of a stock market with the second-highest level of capitalization over gross domestic product (GDP) in the world, and high levels of profitability across several economic sectors. This chapter provides new evidence on the specific ways in which financialization of non-financial corporations in South Africa has resulted in low investment performances, focusing on two large, publicly listed corporations operating across different economic sectors between 2000 and 2019. The analysis shows that, despite sector heterogeneities: (1) corporations have increasingly financed operations, capital expenditure, and distributions to shareholders with d...

This paper sheds new light on the well-known phenomenon of dwindling wage elasticities for married women in the US over the recent decades. Results of a novel model experiment approach via sample data ordering unveil considerable heterogeneity across different wage groups. Yet surprisingly constant wage elasticity estimates are revealed within certain wage groups over time as well as across two widely used US data sources, the Current Population Survey (CPS) and the Panel Study of Income Dynamics (PSID). These findings refute the assumed presence of a single-valued aggregate wage elasticity for working wives. Although womenA­s responsiveness to wages remains largely unchanged over time, we find that the composition of working women into different wage groups has changed considerably, resulting in decreasing wage elasticity estimates at the aggregate level. All these findings were methodologically impossible to acquire had we not dismantled and discarded the stereotyped endogeneity-b...

In the context of the recent slump in global oil prices, the paper investigates the effect of oil price shocks on the economic performance of 51 individual OECD and OPEC economies. We propose an error correction model which allows us to differentiate between short- and longrun price effects. For robustness, structural breaks and potential asymmetries are incorporated. Our approach is particularly interesting, since economic performance is not only measured by GDP, but also by equity indices from the MSCI family. The equity indices provide valuable insights into financial transmission mechanisms, in addition to macroeconomic channels, at much higher frequency than conventional GDP data. We are able to present robust estimates for the severity of oil price shocks for individual economies and thereby identify winners and losers under the current oil price regime.

We apply a novel model-based approach to constructing composite international financial indices (CIFIs) as measures of opportunity cost effects that arise due to openness in money demand models. These indices are tested on the People’s Republic of China (PRC) and Taiwan Province of China (TPC), two economies which differ substantially in size and degree of financial openness. Results show that a) stable money demand equations can be identified if accounting for foreign opportunity costs through CIFIs, b) the monetary policy intervention in the PRC over the global financial crisis period temporarily mitigated disequilibrating foreign shocks to money demand, c) CIFIs capture opportunity costs due to openness more adequately than commonly used US interest rates and d) CIFI construction provides valuable insights into the channels through which foreign financial markets affect domestic money demand.

Over the course of the previous decade, price fluctuations on international commodity markets have been observed to be significantly higher than in the decades before. While in the 1980’s and 90’s price dynamics on these markets could almost entirely be explained by supply and demand alone, special emphasis has also been placed on commodity future trading as an explanatory factor in recent years. It is the aim of this survey to identify possible auxiliary approaches for increasing market transparency and preventing market abuse. Therefore, the size of the market as well as its relevance is assessed in a first step along with the relative importance of individual groups of investors and commodities. An in-depth evaluation of the existing scientific literature then provides an overview over possible means for increasing price stability especially through an increase in market transparency and the limitation of potential market manipulations. Finally, additional approaches are analyzed...