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The Impact Of Commodity Price Volatility On Resource Intensive Economies

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  • Ian Keay

    ()

Abstract

Commodity price volatility is bad for macroeconomicperformance. Virtually all empirical studies that document thisnegative relationship rely on the estimation of aggregate growthequations using cross-section evidence drawn from the post-1970 era.This paper uses a simulation model based on the structure of a dynamicrenewable resource model of optimal extraction to determine whycommodity price volatility affects investment decisions, productionlevels, profitability, and ultimately long run growth. The Canadianforestry sector is used as a case study to assess the relative strengthof each of these effects. Simulation exercises reveal that commodityprice volatility shocks significantly reduce resource firms' equityprices and their demand for reproducible and natural capital. As aresult of these changes in the firms' external financing costs andinvestment incentives, extraction costs rise, output levels and profitsfall, and real GDP per capita growth slows.

Suggested Citation

  • Ian Keay, 2010. "The Impact Of Commodity Price Volatility On Resource Intensive Economies," Working Paper 1274, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1274
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1274.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    price volatility; resource based growth; simulation modeling;
    All these keywords.

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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