Commodity prices and production networks in small open economies

Álvaro Silva, Petre Caraiani, Jorge Miranda-Pinto and Juan Olaya-Agudelo

Journal of Economic Dynamics and Control, 2024, vol. 168, issue C

Abstract: We study the role of domestic production networks in the transmission of commodity price fluctuations in small open economies. First, we present a tractable model of a small open economy's production network to explain sectoral propagation patterns. We demonstrate that the domestic production network is crucial in shaping the propagation of commodity prices. Using a panel of 31 sectors across 9 small open economies, we empirically confirm the model's predictions. Next, we construct a dynamic model of a small open economy featuring a production network to study the macroeconomic importance of the network structure in shaping both aggregate and sectoral responses to commodity price shocks. We show that: (i) the network-adjusted labor share of the commodity sector, rather than the sector's size, is key to understanding the real wage's response to commodity price fluctuations; and (ii) non-unitary elasticities of substitution in production are crucial for understanding the cross-sectional implications of these fluctuations.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:168:y:2024:i:c:s016518892400160x

DOI: 10.1016/j.jedc.2024.104968

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