Learning About Commodity Cycles and Saving- Investment Dynamics in a Commodity-Exporting Economy
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.
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- Luis Felipe Céspedes & Jorge A. Fornero & Jordi Galí, 2013.
"Non-Ricardian Aspects of Fiscal Policy in Chile,"
Central Banking, Analysis, and Economic Policies Book Series,in: Luis Felipe Céspedes & Jordi Galí (ed.), Fiscal Policy and Macroeconomic Performance, edition 1, volume 17, chapter 8, pages 283-322
Central Bank of Chile.
- Luis Felipe Céspedes C. & Jorge A. Fornero & Jordi Galí, 2011. "Non-Ricardian Aspects of Fiscal Policy in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 14(2), pages 79-107, August.
- Luis Felipe Céspedes & Jorge Fornero & Jordi Galí, 2012. "Non-Ricardian Aspects of Fiscal Policy in Chile," Working Papers Central Bank of Chile 663, Central Bank of Chile.
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- Itay Goldstein & Assaf Razin, 2005. "An Information-Based Trade Off between Foreign Direct Investment and Foreign Portfolio Investment," NBER Working Papers 11757, National Bureau of Economic Research, Inc.
- G. M. Grossman & K. Rogoff (ed.), 1995. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 3, number 3, January. Full references (including those not matched with items on IDEAS)