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Commodity prices and labour market dynamics in small open economies

Martin Bodenstein, Gunes Kamber and Christoph Thoenissen ()

Journal of International Economics, 2018, vol. 115, issue C, 170-184

Abstract: We show that a model of an advanced small open economy with exports in commodities and search and matching frictions in the labour market can match the impulse responses from a panel vector autoregression to an identified commodity price shock. Using a minimum distance strategy, we find that international financial risk sharing is low even for advanced small open economies. Moreover, a strong real exchange rate appreciation is key for an unexpected commodity price increase to induce a tightening of labour market conditions in the model that is in line with the empirical evidence. As in the case of technology shocks discussed by Shimer (2005), proper amplification of the commodity price shock requires a high value of the outside option for unemployed agents. However, vacancies and unemployment hardly respond whenever the real exchange rate channel is mute. These findings suggest the relevance of the open economy dimension for the transmission of demand-type shocks to the labour market more generally.

Keywords: Commodity prices; Search and matching unemployment (search for similar items in EconPapers)
JEL-codes: E44 E61 F42 (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: Commodity Prices and Labour Market Dynamics in Small Open Economies (2017) Downloads
Working Paper: Commodity prices and labour market dynamics in small open economies (2016) Downloads
Working Paper: Commodity prices and labour market dynamics in small open economies (2016) Downloads
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