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.