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Learning about Commodity Cycles and Saving-Investment Dynamics in a Commodity-Exporting Economy

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  • Jorge Fornero

    (Central Bank of Chile)

  • Markus Kirchner

    (Central Bank of Chile)

Abstract

Despite high levels of commodity prices, the current accounts of several commodity exporters have deteriorated or even reverted recently. This phenomenon is examined using a quantitative small open-economy model with a commodity sector and with imperfect information and learning about the persistence of commodity price shocks. The model predicts that during a persistent commodity price increase, agents believe at first that this increase is temporary but then revise their expectations upward as they are surprised by higher effective prices. Investment therefore expands gradually, driven by the commodity sector, while domestic savings fall, which explains the observed current account dynamics.

Suggested Citation

  • Jorge Fornero & Markus Kirchner, 2018. "Learning about Commodity Cycles and Saving-Investment Dynamics in a Commodity-Exporting Economy," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 205-262, March.
  • Handle: RePEc:ijc:ijcjou:y:2018:q:1:a:5
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    Cited by:

    1. Fabio Comelli & Esther Perez Ruiz, 2016. "To Bet or Not to Bet; Copper Price Uncertainty and Investment in Chile," IMF Working Papers 16/218, International Monetary Fund.
    2. Fernández, Andrés & González, Andrés & Rodríguez, Diego, 2018. "Sharing a ride on the commodities roller coaster: Common factors in business cycles of emerging economies," Journal of International Economics, Elsevier, vol. 111(C), pages 99-121.
    3. Jorge Fornero & Markus Kirchner & Andrés Yany, 2015. "Terms of Trade Shocks and Investment in Commodity-Exporting Economies," Central Banking, Analysis, and Economic Policies Book Series,in: Rodrigo Caputo & Roberto Chang (ed.), Commodity Prices and Macroeconomic Policy, edition 1, volume 22, chapter 5, pages 135-193 Central Bank of Chile.
    4. Sylvain Leduc & Kevin Moran & Robert J. Vigfusson, 2016. "Learning in the Oil Futures Markets: Evidence and Macroeconomic Implications," CIRANO Working Papers 2016s-53, CIRANO.
    5. Michael Pedersen, 2015. "The Impact of Commodity Price Shocks in a Major Producing Economy. The Case of Copper and Chile," Working Papers Central Bank of Chile 753, Central Bank of Chile.
    6. Arthur Mendes & Steven Pennings, 2018. "Consumption Smoothing and Shock Persistence: Optimal Simple Fiscal Rules for Commodity Exporters," Working Papers 1171, Economic Research Forum, revised 25 Mar 2008.
    7. 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.
    8. Rodrigo Caputo & Roberto Chang, 2015. "Commodity Prices and Macroeconomic Policy: An Overview," Central Banking, Analysis, and Economic Policies Book Series,in: Rodrigo Caputo & Roberto Chang (ed.), Commodity Prices and Macroeconomic Policy, edition 1, volume 22, chapter 1, pages 001-018 Central Bank of Chile.
    9. Pablo García & Sindy Olea, 2015. "Inversión Minera y Ajuste Macroeconómico en Australia y Chile," Economic Policy Papers Central Bank of Chile 56, Central Bank of Chile.
    10. Pitterle, Ingo & Haufler, Fabio & Hong, Pingfan, 2015. "Assessing emerging markets’ vulnerability to financial crisis," Journal of Policy Modeling, Elsevier, vol. 37(3), pages 484-500.
    11. Vo Phuong Mai Le & Ruthira Naraidoo, 2019. "Monetary policy in a Model with Commodity and Financial Markets," Working Papers 201928, University of Pretoria, Department of Economics.
    12. Miguel Angel Saldarriaga, 2017. "Credit Booms in Commodity Exporters," Working Papers 2017-98, Peruvian Economic Association.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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