Macroeconomic Performance During Commodity Price Booms and Busts

Luis Cespedes and Andrés Velasco

No 18569, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Fluctuations in commodity prices are often associated with macroeconomic volatility. But not all nations are created equal in this regard. The macro response to commodity booms and busts depends both on the structural characteristics of the economy and on the policy framework that is in place. In this paper we investigate the macro response of a group of commodity-producing nations in episodes of large commodity prices shocks. First we provide a theoretical framework to analyze how shocks to commodity prices affect the domestic economy. For this we use a simple open-economy model with nominal rigidities and financial frictions. Then we provide empirical evidence (using commodity price boom and bust episodes) that commodity price shocks have a significant impact on output and investment dynamics. Economies with more flexible exchange rate regimes exhibit less pronounced responses of output during these episodes. We also provide evidence that the impact of those shocks on investment tends to be larger for economies with less developed financial markets. Moreover, we find that international reserve accumulation, more stable political systems, and less open capital accounts tend to reduce the real exchange rate appreciation (depreciation) in episodes of commodity price booms (busts).

JEL-codes: E52 E58 F31 F32 F36 F41 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-mac and nep-opm
Note: IFM ME
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Citations: View citations in EconPapers (70)

Published as Luis Felipe C�spedes & Andr�s Velasco, 2012. "Macroeconomic Performance During Commodity Price Booms and Busts," IMF Economic Review, Palgrave Macmillan, vol. 60(4), pages 570-599, December.

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Journal Article: Macroeconomic Performance During Commodity Price Booms and Busts (2012)
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