Effects Of Commodity Price Shocks Research Articles

The Asymmetric Effects of Commodity Price Shocks in Emerging Economies

The Asymmetric Effects of Commodity Price Shocks in Emerging Economies

Monetary Policy Responses to Crude Oil-Price Shocks: The Case of Selected Central Banks

Since the establishment of Central Banks, they have been responsible for their national economic stabilization. This paper explores how selected banks have responded to oil price shocks. Firstly, the paper provides a critical analysis of the effects of commodity price shocks using a version of the three equations – the New Keynesian model. Secondly, the paper chronologically investigates past responses to shocks from five central banks, emphasizing similar and extreme responses and their success. Lastly, the paper utilizes the historical analysis to formulate a recommended response for central banks today. The major outcome of this study is the culmination of a recommendation that proactively implementing contractionary monetary policy alongside expansionary fiscal policy, using conventional and unconventional policies is the most effective.

The distributional dimension of the resource curse: Commodity price shocks and income inequality

How does high dependence on natural resources affect income inequality? Surprisingly little is known about the impact of dependence on primary goods on income distribution. Building on insights from the resource curse literature, this paper studies the relationship between income shocks through changes in commodity prices and income inequality in a panel of 80 countries from 1990 to 2016. We analyze differentiated effects of commodity price shocks depending on the type of commodity (labor vs. capital-intensive). We also study differences across world regions and explore potential mechanisms by looking at different types of inequality (pay-driven vs. capital-rents-driven). Results show that commodity price shocks have an impact on income inequality. However, this impact depends on the type of commodity and inequality.

Global liquidity and commodity market interactions: Macroeconomic effects on a commodity exporting emerging market

This paper examines the effects of commodity demand and supply shocks as well as international liquidity shocks on the small open economy of Brazil using an SVAR model. The paper highlights the importance of modelling both types of shocks in the commodity sector. Including only commodity prices overstates the effect of commodity price shocks on the output of Brazil. Commodity demand shocks are much larger than commodity supply shocks in the long run. Including commodity demand and international liquidity also reduces the impact of commodity price shocks on the interest rate made available to Brazil in international capital markets. There is little evidence of Dutch disease for Brazil. However, our results show that Brazil is vulnerable to external shocks.

Housing and Commodity Investment Booms in a Small Open Economy

We add a housing sector to the Reserve Bank of Australia's small open‐economy model to explore the effect of commodity price shocks on housing investment. The model predicts that housing investment booms may follow commodity booms. Commodity booms have a persistent effect on housing services price inflation and they ‘crowd out’ housing investment. When the commodity boom ends, the combination of higher prices and falling interest rates induces a significant housing investment response. The model attributes a significant share of the recent increase in housing investment in Australia directly to falling commodity prices.

Commodity prices and economic growth in commodity-dependent countries: New evidence from nonlinear and asymmetric analysis

The aim of this paper is to present our examination of the short and long-term asymmetric effects of commodity prices on output per capita within the framework of commodity-dependent countries. First, we adopted a panel Autoregressive Distributive Lag (panel-ARDL) model to disentangle the short and long-term symmetric effects. Our results show that commodity booms have long-term resource blessing effects. In the same way, short-term impacts tend to be positive due to improvements in terms of trade. Moreover, our empirical results provide evidence that the effects of the recent commodities boom (2004–2014) differ from those of previous such phenomena, indicating a learning effect from past experiences. Second, using an innovative panel nonlinear ARDL model, we also examined the short and long-term asymmetric effects of commodity prices on growth by decomposing the commodity price index into positive and negative changes. Our findings provide evidence for the existence of asymmetric effects of commodity price shocks. In the long run, positive changes have greater impacts than negative ones on GDP per capita. Further, our results show that, in the short run, growth is only affected by negative shocks, as the impacts of positive ones are insignificant. Based on our findings, we present implications for policy makers.

The Distributional Dimension of the Resource Curse: Commodity Price Shocks and Income Inequality

How does high dependence on natural resources affect income inequality? Surprisingly little is known about the impact of high dependence on primary goods on income distribution. Building on insights from the resource curse literature, this paper studies the relationship between income shocks through changes in commodity prices and income inequality in a panel of 80 countries from 1990 to 2016. We analyze the differentiated effects of commodity price shocks depending on the type of commodity (labor vs. capital-intensive). We also study differences across world regions and explore potential mechanisms by looking at different types of inequality (pay vs. capital rents). Results show that commodity price shocks have an impact on income inequality. However, this impact depends on the type of commodity and inequality.

Measuring dynamic connectedness networks in energy commodities: evidence from the D‐Y and frequency connectedness approaches

AbstractIn this study, we examine the energy commodities connectedness between the period June 2006 and April 2020 by implementing the Diebold–Yilmaz and the frequency connectedness approaches. We estimate dynamic connectedness between WTI crude oil, the Henry Hub natural gas, ULS diesel and the gasoline prices over the analysed period. Overall spillover indexes estimated by both methodologies properly respond to prominent geopolitical events over the sample period. Additionally, we plot network graphs for directional spillovers reflecting two distinct periods, 2007:3–2019:12 and 2020:1–2020:4. Network analysis verifies that the directional spillovers between energy commodities have prominently surged due to the COVID‐19 outbreak. The findings of the study underline the importance of an effective regulatory framework for monitoring commodity price developments to avoid adverse effects of commodity price shocks. Additionally, the authorities should enact policy actions to counteract the detrimental effects of the COVID‐19 pandemic on the commodity markets.

Do commodity price shocks impact central bank governors' removals? Evidence from Africa

AbstractUsing data from 1980 to 2018 for 32 African countries (13 CFA countries and 19 non‐CFA countries) and a conditional fixed effects logit model, this paper examines the effect of commodity price shocks on the likelihood of a central bank governor removal. Governor removals are decomposed into premature removals and ally replacements. Our results show that commodity price shocks lead to a statistically significant increase in the probability of a central bank governor's premature removal and ally replacement. This trend holds when commodities price shocks are separated into oil/mineral shocks and agricultural commodities shocks. We also find that this probability significantly jumps for countries who have a lower degree of export diversification, that is, countries whose are primarily dependent on a single commodity.

Erratum to “The effect of commodity price shocks on public lands distribution: Evidence from Colombia” [World Dev. 113 (2018) 294–308

Erratum to “The effect of commodity price shocks on public lands distribution: Evidence from Colombia” [World Dev. 113 (2018) 294–308

Disentangling Commodity Demand, Commodity Supply, and International Liquidity Shocks on An Emerging Market

This paper examines the effects of commodity demand and supply shocks as well as international liquidity shocks on the small open economy of Brazil using an SVAR model. The paper highlights the importance of modeling both types of shocks in the commodity sector. Including only commodity prices overstates the effect of commodity price shocks on the output of Brazil. Commodity demand shocks are much larger than commodity supply shocks in the long run. Including commodity demand and international liquidity also reduces the impact of commodity price shocks on the interest rate made available to Brazil in international capital markets. The interest rate channel is considered a source of business cycles for emerging market economies in the literature.

How the financial market can dampen the effects of commodity price shocks

Commodities have begun to function as an asset class during the past decade, as trading in commodity derivatives has increased massively since the mid-2000s. This paper studies the role of commodities as an asset class in accounting for the recently lessened impacts of commodity price shocks on the U.S. economy, by constructing a model with a financial accelerator and with financial intermediaries that own two assets tied to commodities as well as to capital. Simulation results of the model show that financial intermediaries' holdings of commodities as assets have contributed to the recent reduction in the effects of commodity price shocks.

How the Financial Market Can Dampen the Effects of Commodity Price Shocks

Commodities have begun to function as an asset class during the past decade, as trading in commodity derivatives has increased massively since the 2000s. This paper studies the role of commodities as an asset class in accounting for the recently lessened impacts of commodity price shocks on the economy, by constructing a model with financial frictions and with financial intermediaries that own two assets – tied to commodities as well as to capital. Simulation results of the model show that financial intermediaries’ holdings of commodities as assets have contributed to the recent reduction in the effects of commodity price shocks.

The effect of commodity price shocks on public lands distribution: Evidence from Colombia

Abstract How do commodity shocks impact the privatization of public lands? This paper examines this question through the lens of the establishment of private property rights over public lands in Colombia, which has had one of the Western Hemisphere's largest public land distribution programs during the last century. Using data on exogenous international coffee price shocks along with data on land suitability for coffee production as determined by agro-climatic conditions and roughly 250,000 public land grants, I find that coffee price increases generate more public land grants in municipalities where land is more suited to coffee production. Additional tests suggest that the findings are driven by the power of organized cultivators to steer the land grant process in their favor. The findings shed light on the role of organized actors in the countryside extending private extension of control over public territory – a phenomenon that has drastically diminished public lands and natural spaces in numerous countries over the last two centuries.

Effects of commodity price shocks on inflation: a cross-country analysis

Large fluctuations in commodity prices since the 2000s are a renewed concern among policymakers about price stability. This paper investigates the effects of commodity price shocks on headline inflation with a cross-country panel. We find that the effects of commodity price shocks on inflation virtually disappear within about one year after the shock. This transitory effect suggests a low risk of a persistent second-round effect on inflation. While the effect on the price level varies across country groups, the transitory effect is fairly robust. We also allow for the possibility that the effect of commodity price shocks may vary, depending on inflation regimes. Even in this case, we observe the transitory effects at least in countries with exchange-rate flexibility.

Macroeconomic Effects of Commodity Price Shocks in a Low‐income Economy: The Case of Tobacco in Malawi

AbstractA major concern for developing economies is a dependence on commodities when their prices are volatile as a major change in the international commodity price can have important implications for economic growth. While some cross‐country studies exist, there is lack of country specific studies that take into account the different characteristics of low‐income economies. This paper contributes to the growing literature by considering the case of Malawi and the macroeconomic impact of price shocks in its major export crop of tobacco. Using a structural vector autoregression (SVAR) approach on quarterly Malawian data from 1980:1 to 2012:4, the paper establishes that a positive tobacco price shock has a significant positive impact on the country's gross domestic product, decreasing consumer prices and inducing real exchange rate appreciation. The results are robust to alternative specifications of a SVAR on difference stationary data and cointegrating VAR. The cointegrating VAR confirms the existence of a long run‐relationship among the variables and causality that runs from tobacco prices.

Commodity price volatility with endogenous natural resources

Natural resource reserves are exogenous in models of small commodity exporters. Changes in the stock of reserves play no role in the macroeconomy including in business cycle volatility, trade dynamics or exchange rate volatility. We consider richer supply dynamics and model exploration and depletion. We show that an endogenous supply of reserves is important for capturing the stylised facts associated with commodity price shocks including a commodity currency, the crowding-out of non-commodity activity (Dutch-Disease) and a volatile business cycle.We also consider how exploration and depletion affect the ranking of optimal monetary and taxation policies. When natural resource reserves are held fixed, monetary policy is an efficient tool for stabilising the effects of commodity price shocks. However, when exploration and depletion are accounted for, using interest rates to stabilise the effects of commodity price changes becomes inefficient. Using taxes on the resource sector, specifically an ad valorem royalty, remains efficient.

Effects of Commodity Price Shocks on Inflation: A Cross-Country Analysis

Since the 2000s, large fluctuations in commodity prices have become a concern among policymakers regarding price stability. This paper investigates the effects of commodity price shocks on headline inflation with a monthly panel consisting of 144 countries. We find that the effects of commodity price shocks on inflation virtually disappear within about one year after the shock. While the effect on the level of consumer prices varies across countries, this transitory effect is fairly robust, suggesting a low risk of a persistent second-round effect on inflation. Employing the smooth transition autoregressive models that use past inflation as the transition variable, we also explore the possibility that the effect of commodity price shocks could be persistent, depending on inflation regimes. In this specification, commodity price shocks may not have transitory effects when a country’s currency is pegged to the U.S. dollar. However, the effect remains transitory in countries with exchange-rate flexibility.

Commodity prices and fiscal policy in a commodity exporting economy

This paper analyzes the macroeconomic effects of commodity price shocks on a commodity exporting country. In doing so, we use a DSGE model developed to describe the business cycle in Chile, a copper exporting country. We compare the effects of commodity-price shocks under different fiscal rules. The results show that if the fiscal policy is conducted in a way such that the government saves most of the extra revenues from the higher commodity price, then the macroeconomic effects of a commodity price increase of 10% are an expansion of output below 0.2% and a real exchange appreciation of 0.5%. In contrast, when fiscal policy is highly expansive, the same commodity price increase implies an output expansion above 0.5% and a real exchange rate appreciation of 0.8%. With our model, we also analyze the effects of persistent reduction in the commodity price, the relevance of exchange rate flexibility and the role of imperfect credibility of the fiscal rule.

The Effects of Commodity Price Shocks on Fiscal Aggregates in Latin America

This paper analyzes the effects of commodity price shocks on fiscal revenues and expenditures in Latin American countries quarterly from 1995 to 2013. The results indicate that Latin American countries’ fiscal aggregates rise in response to positive shocks to commodity prices, yet there are marked differences across countries. Fiscal variables in Venezuela display the highest sensitivity to commodity price shocks, with expenditures responding significantly more than revenues. At the other end of the spectrum, in Chile expenditures respond very little to commodity price fluctuations and the dynamic responses of its fiscal indicators are very similar to those seen in high-income commodity-exporting countries. The results suggest that this heterogeneity may relate to the enactment of fiscal rules, as dynamic panel estimations show that government expenditures in countries with fiscal rules respond less to shocks to commodity prices.