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Commodity Price Cycles; The Perils of Mismanaging the Boom

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  • Sebastian Sosa
  • Gustavo Adler

Abstract

Commodity-exporting countries have significantly benefited from the commodity price boom of recent years. At the current juncture, however, uncertain global economic prospects have raised questions about their vulnerability to a sharp fall in commodity prices and the policies that can shield it from such a shock. To address these questions, this paper takes a long term (4 decade) view at emerging markets' commodity dependence, the history of commodity price busts and the role of policies in mitigating or amplifying their economic impact. The paper highlights the stark difference in trends between Latin America - one of the most vulnerable regions given its high, and rising, commodity dependence - and emerging Asia - which has evolved from being a net exporter to a net importer of commodities in the last 40 years. We find evidence, however, that while commodity dependence is an important ingredient, a country's ultimate degree of vulnerability to commodity price shocks is to a great extent determined by the flexibility and quality of its policy framework. Policies in the run-up of sharp terms-of-trade drops - especially when those are preceded by booms - play a particularly important role. Limited exchange rate flexibility, a weak external position, and loose fiscal policy tend to amplify the negative effects of these shocks on domestic output. Financial dollarization also appears to act as a shock "amplifier."

Suggested Citation

  • Sebastian Sosa & Gustavo Adler, 2011. "Commodity Price Cycles; The Perils of Mismanaging the Boom," IMF Working Papers 11/283, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/283
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    References listed on IDEAS

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    1. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 47-100, January.
    2. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
    3. Ethan Ilzetzki & Carmen M. Reinhart & Kenneth S. Rogoff, 2017. "Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?," NBER Working Papers 23134, National Bureau of Economic Research, Inc.
    4. Alejandro Izquierdo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability in Argentina," The World Economy, Wiley Blackwell, vol. 25(7), pages 903-923, July.
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    Citations

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    Cited by:

    1. Jaroslava Durčáková & Ondřej Šíma, 2013. "BRICS: Exchange Rate policy in Context of Internal and External Equilibrium," Český finanční a účetní časopis, University of Economics, Prague, vol. 2013(4), pages 7-29.
    2. West, James & Schandl, Heinz, 2013. "Material use and material efficiency in Latin America and the Caribbean," Ecological Economics, Elsevier, vol. 94(C), pages 19-27.
    3. Gustavo Adler & Sebastian Sosa, 2016. "External Factors in Debt Sustainability Analysis: An Application to Latin America?," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 1(5), pages 81-120, June.
    4. Ignacio Lozano & Ligia Alba Melo B. & Jorge Enrique Ramos F., 2012. "Flujos de capital y política fiscal en las economías emergentes de América Latina," BORRADORES DE ECONOMIA 009439, BANCO DE LA REPÚBLICA.
    5. Bertrand Gruss, 2014. "After the Boom–Commodity Prices and Economic Growth in Latin America and the Caribbean," IMF Working Papers 14/154, International Monetary Fund.
    6. Snudden, Stephen, 2016. "Cyclical fiscal rules for oil-exporting countries," Economic Modelling, Elsevier, vol. 59(C), pages 473-483.
    7. Luis Felipe Céspedes & Andrés Velasco, 2012. "Macroeconomic Performance During Commodity Price Booms and Busts," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(4), pages 570-599, December.
    8. Gustavo Adler & Sebastián Sosa, 2014. "Intraregional Spillovers in South America: Is Brazil Systemic After All?," The World Economy, Wiley Blackwell, vol. 37(3), pages 456-480, March.
    9. Luis Ignacio Lozano Espitia & Ligia Alba Melo-Becerra & Jorge Enrique Ramos, 2016. "La política fiscal frente a los flujos de capital: evidencia para algunos países de América Latina," REVISTA APUNTES DEL CENES, UNIVERSIDAD PEDAGOGICA Y TECNOLOGICA DE COLOMBIA, vol. 35(62), pages 53-85, July.
    10. Gustavo Adler & Camilo E Tovar Mora, 2012. "Riding Global Financial Waves; The Economic Impact of Global Financial Shocks on Emerging Market Economies," IMF Working Papers 12/188, International Monetary Fund.
    11. Gustavo Adler & Nicolas E Magud, 2013. "Four Decades of Terms-of-Trade Booms; Saving-Investment Patterns and a New Metric of Income Windfall," IMF Working Papers 13/103, International Monetary Fund.
    12. 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.
    13. Gustavo Adler & Sebastian Sosa, 2013. "External Conditions and Debt Sustainability in Latin America," IMF Working Papers 13/27, International Monetary Fund.
    14. Calzada Olvera, Beatriz & Foster-McGregor, Neil, 2018. "What is the potential of natural resource based industrialisation in Latin America? An Input-Output analysis of the extractive sectors," MERIT Working Papers 015, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    15. Adler, Gustavo & Magud, Nicolas E., 2015. "Four decades of terms-of-trade booms: A metric of income windfall," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 162-192.

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