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

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  • Jorge Fornero
  • Markus Kirchner

Abstract

Despite sustained high levels of commodity prices, the current account balances of several commodity-exporting countries have deteriorated in recent years. This phenomenon is examined quantitatively using a small open economy model with a commodity-producing sector and the assumption that agents have imperfect information and learn about the persistence of commodity price shocks. A central prediction of the model is that during a persistent commodity price increase, agents believe at first that this increase is temporary but eventually revise their expectations upward as they are surprised by higher than forecasted commodity price levels. Domestic investment therefore expands in a gradual way driven by investment in the commodity sector, while domestic savings decrease such that the current account declines over time. The model is estimated with data for Chile, and the results show that through the above mechanism the model explains several stylized facts regarding the recent evolution of the Chilean economy, including part of its step-wise current account reversal since the mid-2000s. Additionally, we use the model to analyze the effects of a persistent commodity price shock under alternative monetary and fiscal policies.

Suggested Citation

  • Jorge Fornero & Markus Kirchner, 2014. "Learning About Commodity Cycles and Saving- Investment Dynamics in a Commodity-Exporting Economy," Working Papers Central Bank of Chile 727, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:727
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    Cited by:

    1. 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.
    2. 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.
    3. Leduc, Sylvain & Moran, Kevin & Vigfusson, Robert J., 2016. "Learning in the Oil Futures Markets: Evidence and Macroeconomic Implications," International Finance Discussion Papers 1179, Board of Governors of the Federal Reserve System (U.S.).
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Miguel Angel Saldarriaga, 2017. "Credit Booms in Commodity Exporters," Working Papers 2017-98, Peruvian Economic Association.
    9. 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.
    10. 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.

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    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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