The adjustment to commodity price shocks

Abstract

This paper analyzes the macroeconomic adjustment in commodityexporting countries to commodity price shocks. First, I estimate a heterogenous panel SVAR using data from 22 commodityexporting economies spanning the period 1980-2017. I find that commodity terms of trade shocks are an important driver of business-cycle fluctuations: they explain around 30 percent of movements in output, contrary to the 10 percent found in recent studies. However, there is wide variation in the responses to a commodity terms of trade innovation across countries. Second, I use panel SVARs to study the role of various key country characteristics and economic policies in the macroeconomic response to these shocks. I find evidence that exchange rate flexibility, inflation targeting regimes and fiscal rules help insulate the economy from commodity price movements.

Assessing the Commodity Market Price and Terms of Trade Exposures of Macroeconomy in Emerging and Developing Countries

“…Schmitt-Grohé and Uribe (2018) findings. In particular, the impulse responses reveal how real aggregate output and private investments improve because of favorable price changes, which strongly supports the evidence in Roch (2019). Most importantly, we find that a favorable commodity price shock appreciates the real exchange rate, which makes these economies competitively cheaper in terms of foreign goods, but the downside effect is a rise in the prices of consumer goods (inflationary effects) and a prominent contraction in private consumption.…”

“…These reactions are statistically significant within the 95% confidence margins. Similarly, the responses shown in row (b) indicate that a favorable commodity terms of trade shock causes output to rise immediately, whilst the real effective exchange rate appreciates after a year (see also Roch 2019). However, private consumption and consumer price inflation seem to contract immediately after the shock.…”

“…On the other hand, Ben-Zeev, Pappa, and Vicondoa (2017) propose that the commodity terms of trade shocks could constitute almost half of the output fluctuations in Latin American economies. Sizable impact has also been reported in Roch (2019) estimates using heterogenous panel model show that the commodity price shocks can explain even 30% of the movements in output among the Latin American countries.…”

“…Previous inference about the significance of the commodity and standard terms of trade exposures is very heterogenous. Theoretical real business cycle models, which calibrate the impacts of standard and/or commodity terms of trade shocks on the macro variables propose that the commodity terms of trade shocks are the major source of economic fluctuations among the emerging and developing countries (see Aguiar and Gopinath 2007;Bidarkota and Crucini 2000;Broda 2004;Drechsel and Tenreyro 2018;Fernández, Schmitt-Grohé, and Uribe 2017;Fornero, Kirchner, and Yany 2016;Kose 2002;Mendoza 1997;Roch 2019;Schmitt-Grohé and Uribe 2018;Shousha 2016). In general, the results seem to be method dependent: For example, Schmitt-Grohé and Uribe (2018) have indicated that although the results may vary across countries, the terms of trade shocks would constitute only 10% of the macroeconomic fluctuations in the developing economics.…”

Drivers of food price in China: A heterogeneous panel SVAR approach

“…The approach in Pedroni (2013) allows for complete heterogeneity in the dynamic responses across individual members of the panel while also accounting for the cross‐sectional dependence due to shocks that are common across members of the panel. This modeling strategy is increasingly used in recent years, and the related literature can be found in Ha, Ivanova, Montiel, and Pedroni (2019), Hao, Pedroni, Colson, and Wetztein (2017), Mishra, Montiel, Pedroni, and Spilimbergo (2014), Montiel and Pedroni (2019), and Roch (2019).…”