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Macroeconomic Performance During Commodity Price Booms and Busts

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  • Luis Felipe Céspedes
  • Andrés Velasco

Abstract

Fluctuations in commodity prices are often associated with macroeconomic volatility. But not all nations are created equal in this regard. The macro response to commodity booms and busts depends both on the structural characteristics of the economy and on the policy framework that is in place. This paper investigates the macro response of a group of commodity-producing nations in episodes of large commodity prices shocks. First, it provides a theoretical framework to analyze how shocks to commodity prices affect the domestic economy. For this the paper uses a simple open-economy model with nominal rigidities and financial frictions. Then it provides empirical evidence (using commodity price boom and bust episodes) that commodity price shocks have a significant impact on output and investment dynamics. Economies with more flexible exchange rate regimes exhibit less pronounced responses of output during these episodes. The paper also provides evidence that the impact of those shocks on investment tends to be larger for economies with less developed financial markets. Moreover, it finds that international reserve accumulation, more stable political systems, and less open capital accounts tend to reduce the real exchange rate appreciation (depreciation) in episodes of commodity price booms (busts).

Suggested Citation

  • Luis Felipe Céspedes & Andrés Velasco, 2012. "Macroeconomic Performance During Commodity Price Booms and Busts," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(4), pages 570-599, December.
  • Handle: RePEc:pal:imfecr:v:60:y:2012:i:4:p:570-599
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    References listed on IDEAS

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    1. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-137, February.
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    More about this item

    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
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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