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Commodity price shocks, labour market dynamics and monetary policy in small open economies

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  • Naraidoo, Ruthira
  • Paez-Farrell, Juan

Abstract

We analyse the transmission mechanism of commodity price shocks in inflation targeting emerging economies. Using a panel vector autoregression, we find that for a commodity exporter, the shock causes a real exchange rate appreciation, increases in output, inflation, the nominal interest rate and the trade balance, and a fall in the unemployment rate. The mechanism underlying the dynamics driving the VAR can be understood using a dynamic stochastic general equilibrium model. Search and matching frictions in the labour market and the conduct of monetary policy are key for the model to match the data.

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  • Naraidoo, Ruthira & Paez-Farrell, Juan, 2023. "Commodity price shocks, labour market dynamics and monetary policy in small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:dyncon:v:151:y:2023:i:c:s016518892300060x
    DOI: 10.1016/j.jedc.2023.104654
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    More about this item

    Keywords

    Commodity prices; Emerging markets; Inflation; Monetary policy; Search and matching; Unemployment; Dutch disease; DSGE modelling; Bayesian impulse response matching;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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