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To Bet or Not to Bet: Copper Price Uncertainty and Investment in Chile

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  • Mr. Fabio Comelli
  • Mrs. Esther Perez Ruiz

Abstract

A strand of research documents Chile’s copper dependence hence significant exposure to terms of trade shocks. Copper prices’ sharp decline and forecast uncertainty since the end of the commodity super-cycle has rekindled the debate on Chile’s adjustment capacity to external shocks. Following Malz (2014), this paper builds a time-varying measure of copper price uncertainty using options contracts. VAR analysis shows that the investment response to an uncertainty shock of average magnitude in the sample is strong and persistent: the cumulative fall in investment from trend at a one-year horizon ranges 2–5.8 percentage points; and it takes between 1½ and 2 years for investment to return to its trend level. Empirical ranges depend on alternative definitions for investment, uncertainty, and options’ maturing time.

Suggested Citation

  • Mr. Fabio Comelli & Mrs. Esther Perez Ruiz, 2016. "To Bet or Not to Bet: Copper Price Uncertainty and Investment in Chile," IMF Working Papers 2016/218, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2016/218
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    References listed on IDEAS

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    Cited by:

    1. Jorge Fornero & Markus Kirchner, 2018. "Learning about Commodity Cycles and Saving-Investment Dynamics in a Commodity-Exporting Economy," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 205-262, March.
    2. Maren Brandt & Loreto Bieritz & Anke Mönnig & Anett Großmann, 2017. "Development of Sustainable Mining Strategies in Chile with a Regionalized National Model – Project introduction and overview," GWS Discussion Paper Series 17-2, GWS - Institute of Economic Structures Research.

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