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Commodity Booms and Busts in Emerging Economies

Listed author(s):
  • Thomas Drechsel
  • Silvana Tenreyro

Emerging economies, particularly those dependent on commodity exports, are prone to highly disruptive economic cycles. This paper proposes a small open economy model for a net commodity exporter to quantitatively study the triggers of these cycles. The economy consists of two sectors, one of which produces commodities with prices subject to exogenous international fluctuations. These fluctuations affect both the competitiveness of the economy and its borrowing terms, as higher commodity prices are associated with lower spreads between the country's borrowing rate and world interest rates. Both effects jointly result in strongly positive effects of commodity price increases on GDP, consumption and investment, and a negative effect on the total trade balance. Furthermore, they generate excess volatility of consumption over output and a large volatility of investment. The model structure nests various candidate sources of shocks proposed in previous work on emerging economy business cycles. Estimating the model on Argentine data, we find that the contribution of commodity price shocks to fluctuations in post-1950 output growth is in the order of 38%. In addition, commodity prices account for around 42% and 61% of the variation in consumption and investment growth, respectively. We find transitory productivity shocks to be an important driver of output fluctuations, exceeding the contribution of shocks to the trend, which is smaller, although not negligible.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23716.

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Date of creation: Aug 2017
Publication status: Forthcoming: Commodity Booms and Busts in Emerging Economies , Thomas Drechsel, Silvana Tenreyro. in NBER International Seminar on Macroeconomics 2017 , Frankel and Rey. 2017
Handle: RePEc:nbr:nberwo:23716
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  1. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-137, February.
  2. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters,in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  4. Javier Garcia-Cicco & Roberto Pancrazi & Martin Uribe, 2010. "Real Business Cycles in Emerging Countries?," American Economic Review, American Economic Association, vol. 100(5), pages 2510-2531, December.
  5. Grilli, Enzo R & Yang, Maw Cheng, 1988. "Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows," World Bank Economic Review, World Bank Group, vol. 2(1), pages 1-47, January.
  6. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
  7. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, vol. 69(1), pages 6-36, June.
  8. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
  9. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
  10. Stephan Pfaffenzeller & Paul Newbold & Anthony Rayner, 2007. "A Short Note on Updating the Grilli and Yang Commodity Price Index," World Bank Economic Review, World Bank Group, vol. 21(1), pages 151-163.
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  12. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
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  17. Bernardo Guimaraes, 2011. "Sovereign default: which shocks matter?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 553-576, October.
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  19. Céspedes, Luis Felipe & Velasco, Andrés, 2014. "Was this time different?: Fiscal policy in commodity republics," Journal of Development Economics, Elsevier, vol. 106(C), pages 92-106.
  20. Juan Antolin-Diaz & Thomas Drechsel & Ivan Petrella, 2017. "Tracking the Slowdown in Long-Run GDP Growth," The Review of Economics and Statistics, MIT Press, vol. 99(2), pages 343-356, May.
  21. Diego Bastourre & Jorge Carrera & Javier Ibarlucia & Mariano Sardi, 2012. "Common Drivers in Emerging Market Spreads and Commodity Prices," BCRA Working Paper Series 201257, Central Bank of Argentina, Economic Research Department.
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