El Niño and Commodity Prices: New Findings From Partial Wavelet Coherence Analysis

Abstract

This study investigates whether the El Niño Southern Oscillation (ENSO) affects primary commodity prices over time. We employ a wavelet approach that allows us to disentangle the time and frequency domains and to uncover time-varying nonlinear relationships at different frequency levels. Moreover, we adopt partial wavelet coherence (PWC) and eliminate macroeconomic effects on commodity prices. We observe that ENSO is associated with agricultural, food, and raw material commodity prices at lower frequencies of 32–64 and 64–128 months. These results are stronger from 2000 onward, which are not observed using a conventional wavelet method. Our results suggest a recent strong relationship between ENSO and commodity prices, which has important implications for policymakers regarding climate change risk.