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Production Networks and the Propagation of Commodity Price Shocks

Author

Listed:
  • Shutao Cao

    (Bank of Canada)

  • Wei Dong

    (Bank of Canada)

Abstract

Commodity price fluctuations have macroeconomic implications not only through resource reallocation, currency value changes and monetary policy reaction, but also through production network linkages. In this paper, we study the propagation of commodity price shocks in a multiple-sector general equilibrium model for a small open economy that exports commodity. In the small open economy, a shock to commodity prices is both aggregate and sectoral. As an aggregate shock, commodity price movements lead to changes in the value of domestic currency, impacting the macro economy due to its size and triggering monetary policy responses. As a sectoral shock, changes in commodity price impact non-commodity sectors in two aspects: impacting demand for the upstream goods and impacting the cost of production in the downstream sectors. Calibrated to the Canadian data, our model suggests that, following a positive shock to commodity prices, production and exports in the commodity sector rises, while the net impact on the rest of the economy's production is negative. The aggregate gross domestic output increases primarily owing to growth in investment and improved trade balance. The export connection with the rest of the world in the open economy production network plays an important role in the process of adjusting to a commodity price shock, while the import connections do not matter nearly as much. We show that these propagation channels of shocks to commodity price explain a large fraction of drop in Canadian real GDP in 2015 following the sharp decline in commodity prices that started in late 2014.

Suggested Citation

  • Shutao Cao & Wei Dong, 2019. "Production Networks and the Propagation of Commodity Price Shocks," 2019 Meeting Papers 612, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:612
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    References listed on IDEAS

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    Cited by:

    1. Barauskaite, Kristina & Nguyen, Anh D.M., 2021. "Global intersectoral production network and aggregate fluctuations," Economic Modelling, Elsevier, vol. 102(C).

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    More about this item

    JEL classification:

    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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