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The Impact of Commodity Price Shocks in a Major Producing Economy. The Case of Copper and Chile

Listed author(s):
  • Michael Pedersen

The present study analyzes how copper price shocks affect macroeconomic variables in Chile, which is the largest producer in the world of this commodity. It is taken into account that shocks with different sources may have different impacts and a separation is made between supply, demand, and specific copper demand shocks. The empirical analysis is based on a structural VAR model, where shocks are identified by sign restrictions, i.e. restrictions are imposed on impulse-response functions. Indeed the results show that the source of the shock is relevant for the economic impact. While a rise in the copper price caused by increased world demand implies higher growth in Chile, impacts of supply and specific copper demand shocks are, at least in the short run, negative for growth. Higher growth in the case of a demand shock implies higher inflation after a couple of quarters and a following more restrictive monetary policy (higher interest rate). A supply shock, on the other hand, does not have significant effects on either inflation or the interest rate. A specific copper demand shock results in a (though not statistically significantly) depreciation of the exchange rate and higher inflation, which, in turn, implies a higher interest rate.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 753.

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Date of creation: Apr 2015
Handle: RePEc:chb:bcchwp:753
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  16. Franklin M. Fisher & Paul H. Cootner & Martin N. Baily, 1972. "An Econometric Model of the World Copper Industry," Bell Journal of Economics, The RAND Corporation, vol. 3(2), pages 568-609, Autumn.
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