COMMODITY PRICE SHOCKS IN RESOURCE-RICH DEVELOPING ECONOMIES

Abstract

I use a panel vector autoregressive approach to investigate the existence of a dynamic feedback mechanism between an exogenous commodity price shock and the macroeconomic fundamentals of 33 resource-rich developing small open economies for the period 1980-2012. I find the shock in both the fuel and mineral prices to independently have significant and persistent positive effects on real output and real exchange rates. An introduction of monetary policy interactions does not change the net effects of the commodity shock on output and exchange rates, but slightly dampens the magnitude of the response in the latter. Inflation responds positively to the commodity shock, and real interest rate shows a decline, corresponding to what would be an intuitive policy move by an inflation-targeting central bank. Impulse responses confirm the hypothesis and empirical observations that a commodity price boom generates sustained output booms, exchange rate appreciation, increasing inflation and decreasing interest rates.