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Commodity Price Cycles

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Author Info

  • Sebastian Sosa
  • Gustavo Adler

Abstract

Commodity-exporting countries have significantly benefited from the commodity price boom of recent years. At the current juncture, however, uncertain global economic prospects have raised questions about their vulnerability to a sharp fall in commodity prices and the policies that can shield it from such a shock. To address these questions, this paper takes a long term (4 decade) view at emerging markets'' commodity dependence, the history of commodity price busts and the role of policies in mitigating or amplifying their economic impact. The paper highlights the stark difference in trends between Latin America - one of the most vulnerable regions given its high, and rising, commodity dependence - and emerging Asia - which has evolved from being a net exporter to a net importer of commodities in the last 40 years. We find evidence, however, that while commodity dependence is an important ingredient, a country''s ultimate degree of vulnerability to commodity price shocks is to a great extent determined by the flexibility and quality of its policy framework. Policies in the run-up of sharp terms-of-trade drops - especially when those are preceded by booms - play a particularly important role. Limited exchange rate flexibility, a weak external position, and loose fiscal policy tend to amplify the negative effects of these shocks on domestic output. Financial dollarization also appears to act as a shock "amplifier."

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/283.

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Length: 39
Date of creation: 01 Dec 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/283

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Related research

Keywords: Commodity prices; Terms of trade; Asia; Emerging markets; External shocks; Latin America; commodity exports; trade shocks; terms of trade shocks; commodity exporters; export prices; export diversification; dollarization; import prices; trade shock; total exports; exporters; exports of goods; exporter; agricultural exports; external position; export structure; trade openness; terms-of-trade shocks; export concentration; commodity exporter; energy exports; exporting countries; net exporter; trade changes; output growth; net energy exports; current account balance; energy exporters; net exports; oil exports; trade structures; exchange rate regimes; commodity export; commodity-exporting countries; idiosyncratic shocks; changes in trade; world growth; reserve holdings; global shocks; capital account liberalization; global supply; trade structure; export structures; global markets; impact of trade; exchange rate regime; net oil exports; external trade; global growth prospects; importing countries; wholesale price; exchange rate depreciation; multiple sources;

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References

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  1. Barsky, Robert & Kilian, Lutz, 2004. "Oil and the Macroeconomy Since the 1970s," CEPR Discussion Papers 4496, C.E.P.R. Discussion Papers.
  2. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," NBER Working Papers 8249, National Bureau of Economic Research, Inc.
  3. Alejandro Izquierdo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability in Argentina," The World Economy, Wiley Blackwell, vol. 25(7), pages 903-923, 07.
  4. Graciela L. Kaminsky, 2010. "Terms of Trade Shocks and Fiscal Cycles," NBER Working Papers 15780, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. West, James & Schandl, Heinz, 2013. "Material use and material efficiency in Latin America and the Caribbean," Ecological Economics, Elsevier, vol. 94(C), pages 19-27.
  2. Stephen Snudden, 2013. "Cyclical Fiscal Rules for Oil-Exporting Countries," IMF Working Papers 13/229, International Monetary Fund.
  3. Gustavo Adler & Nicolas E. Magud, 2013. "Four Decades of Terms-of-Trade Booms," IMF Working Papers 13/103, International Monetary Fund.
  4. Ignacio Lozano & Ligia Alba Melo B. & Jorge Enrique Ramos F., 2012. "Flujos de capital y política fiscal en las economías emergentes de América Latina," BORRADORES DE ECONOMIA 009439, BANCO DE LA REPÚBLICA.
  5. Sebastian Sosa & Gustavo Adler, 2012. "Intra-Regional Spillovers in South America," IMF Working Papers 12/145, International Monetary Fund.
  6. Gustavo Adler & Camilo Ernesto Tovar Mora, 2012. "Riding Global Financial Waves," IMF Working Papers 12/188, International Monetary Fund.
  7. Gustavo Adler & Sebastian Sosa, 2013. "External Conditions and Debt Sustainability in Latin America," IMF Working Papers 13/27, International Monetary Fund.
  8. Jaroslava Durčáková & Ondřej Šíma, 2013. "BRICS: Exchange Rate policy in Context of Internal and External Equilibrium," Český finanční a účetní časopis, University of Economics, Prague, vol. 2013(4), pages 7-29.

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