Commodity prices and fiscal policy in a commodity exporting economy

Juan Pablo Medina, Claudio Soto

Research output: Contribution to journalArticlepeer-review

28 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)335-351
Number of pages17
JournalEconomic Modelling
Volume59
DOIs
StatePublished - 1 Dec 2016
Externally publishedYes

Keywords

  • Business cycle
  • Commodity price
  • DSGE models
  • Fiscal and monetary policies

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