The Commodity Terms of Trade, Unit Roots, and Nonlinear Alternatives: A Smooth Transition Approach

This article extends the recent literature on the Prebisch-Singer hypothesis of a long-run decline in the relative prices of primary commodities. Our main innovation is testing for and estimating nonlinear alternatives to a secular deterioration. Specifically, we use bootstrap procedures to test the linear unit root model against models belonging to the family of smooth transition autoregressions (STARs) for twenty-four commodities, 1900-2003. In nineteen cases we reject the linear null at usual significance levels. In sixteen cases we are able to successfully fit STAR-type models. Simulation results show there is little support for the Prebisch-Singer hypothesis.