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The Impact Of Commodity Price Volatility On Resource Intensive Economies

Ian Keay

No 1274, Working Paper from Economics Department, Queen's University

Abstract: Commodity price volatility is bad for macroeconomicperformance. Virtually all empirical studies that document thisnegative relationship rely on the estimation of aggregate growthequations using cross-section evidence drawn from the post-1970 era.This paper uses a simulation model based on the structure of a dynamicrenewable resource model of optimal extraction to determine whycommodity price volatility affects investment decisions, productionlevels, profitability, and ultimately long run growth. The Canadianforestry sector is used as a case study to assess the relative strengthof each of these effects. Simulation exercises reveal that commodityprice volatility shocks significantly reduce resource firms' equityprices and their demand for reproducible and natural capital. As aresult of these changes in the firms' external financing costs andinvestment incentives, extraction costs rise, output levels and profitsfall, and real GDP per capita growth slows.

Keywords: price volatility; resource based growth; simulation modeling (search for similar items in EconPapers)
JEL-codes: O13 Q23 Q32 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2010-12
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