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Emerging Asia's Impact on Food and Oil Prices: A Model-Based Analysis

Author

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  • René Lalonde
  • Philipp Maier
  • Dirk Muir

Abstract

The authors explore the usefulness of macroeconomic models in analyzing global economic developments by examining movements in commodity prices between July 2007 and July 2008. They use the Bank of Canada's version of the Global Economy Model and investigate the longerterm outlook for commodity prices by constructing two different, globally consistent, scenarios for emerging Asia. In the first scenario, the authors assume that a persistent increase in emerging Asia's productivity underlies its sustained growth; in the second scenario, they assume that a combination of productivity increases and a temporary demand shock underlie its growth. The demand for commodities increases in both scenarios, but, by comparing the two, the authors reveal that each scenario has considerably different economic implications. Allowing for the possibility that a small share of emerging Asia's growth might be fuelled by a temporary demand shock generates a strong "boom-bust" outcome for emerging Asia, and amplifies the volatility in commodity markets. The authors also investigate the possibility that emerging markets react to inflation by revaluing their exchange rates by 10 per cent. This affects the outlook for commodities only marginally.

Suggested Citation

  • René Lalonde & Philipp Maier & Dirk Muir, 2009. "Emerging Asia's Impact on Food and Oil Prices: A Model-Based Analysis," Discussion Papers 09-3, Bank of Canada.
    • Handle: RePEc:bca:bocadp:09-3
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    References listed on IDEAS

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    1. Calista Cheung & Sylvie Morin, 2007. "The Impact of Emerging Asia on Commodity Prices," Money Affairs, CEMLA, vol. 0(2), pages 181-224, July-Dece.
    2. Faruqee, Hamid & Laxton, Douglas & Muir, Dirk & Pesenti, Paolo, 2008. "Would protectionism defuse global imbalances and spur economic activity? A scenario analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2651-2689, August.
    3. Selim Elekdag & René Lalonde & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2008. "Oil Price Movements and the Global Economy: A Model-Based Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 297-311, June.
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    Cited by:

    1. René Lalonde & Dirk Muir, 2009. "BoC-GEM: Modelling the World Economy," Bank of Canada Review, Bank of Canada, vol. 2009(Summer), pages 43-53.
    2. Feng Lu & Yuanfang Li, 2009. "China’s Factor in Recent Global Commodity Price and Shipping Freight Volatilities," Trade Working Papers 22889, East Asian Bureau of Economic Research.

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    More about this item

    Keywords

    International topics; Recent economic and financial developments;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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