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Revisiting the commodity curse: a financial perspective

Listed author(s):
  • Enrique Alberola-Ila
  • Gianluca Benigno

We study the response of a three-sector commodity-exporter small open economy to a commodity price boom. When the economy has access to international borrowing and lending, a temporary commodity price boom brings about the standard wealth effect that stimulates demand and has long-run implications on the sectoral allocation of labor. If dynamic productivity gains are concentrated in the traded goods sector, the commodity boom crowds out the traded sector and delays convergence to the world technology frontier. Financial openness by stimulating current demand, amplifies the crowding out effect and may even lead to a growth trap, in which no resources are allocated to the traded sector. From a normative point of view, our analysis suggests that capital account management policies could be welfare improving in those circumstances.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 609.

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Length: 55 pages
Date of creation: Feb 2017
Handle: RePEc:bis:biswps:609
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