Commodity price return effects on GDP growth in inflationary times: empirical evidence from net-commodity-exporting countries

Abstract: This paper investigates the effect of real commodity price returns on the gross domestic product (GDP) growth rate, mainly in periods of inflation. The goal is to help policymakers and investors hedge this effect in net-commodity-exporting countries. We conduct our study with four commodity price indexes: energy, food and beverages, precious metals and agricultural raw materials. The panel smooth transition regression (PSTR) model is used to test the non-linear effect on GDP growth of real commodity price returns through the transitional channel of the inflation rate. We find a significant non-linear relationship between real commodity price returns and GDP growth rate for the different panels being studied. The research contributes to the existing literature by providing evidence that the inflation rate is one of the most important transmission channels of commodity prices to real economic activity. Moreover, the empirical results highlight how the positive impact of commodity price returns on GDP growth is dampened in the second regime (i.e. above the threshold value). During rising and persistent inflation, investors should diversify their portfolio beyond the traditional stock and bond markets to reduce the risk of inflation.