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Commodity prices and fiscal policy in a commodity exporting economy

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  • Medina, Juan Pablo
  • Soto, Claudio

Abstract

This paper analyzes the macroeconomic effects of commodity price shocks on a commodity exporting country. In doing so, we use a DSGE model developed to describe the business cycle in Chile, a copper exporting country. We compare the effects of commodity-price shocks under different fiscal rules. The results show that if the fiscal policy is conducted in a way such that the government saves most of the extra revenues from the higher commodity price, then the macroeconomic effects of a commodity price increase of 10% are an expansion of output below 0.2% and a real exchange appreciation of 0.5%. In contrast, when fiscal policy is highly expansive, the same commodity price increase implies an output expansion above 0.5% and a real exchange rate appreciation of 0.8%. With our model, we also analyze the effects of persistent reduction in the commodity price, the relevance of exchange rate flexibility and the role of imperfect credibility of the fiscal rule.

Suggested Citation

  • Medina, Juan Pablo & Soto, Claudio, 2016. "Commodity prices and fiscal policy in a commodity exporting economy," Economic Modelling, Elsevier, vol. 59(C), pages 335-351.
    • Handle: RePEc:eee:ecmode:v:59:y:2016:i:c:p:335-351
    DOI: 10.1016/j.econmod.2016.08.002
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    More about this item

    Keywords

    Commodity price; Fiscal and monetary policies; DSGE models; Business cycle;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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