IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v59y2016icp335-351.html
   My bibliography  Save this article

Commodity prices and fiscal policy in a commodity exporting economy

Author

Listed:
  • Medina, Juan Pablo
  • Soto, Claudio

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.

Suggested Citation

  • Medina, Juan Pablo & Soto, Claudio, 2016. "Commodity prices and fiscal policy in a commodity exporting economy," Economic Modelling, Elsevier, vol. 59(C), pages 335-351.
    • Handle: RePEc:eee:ecmode:v:59:y:2016:i:c:p:335-351
    DOI: 10.1016/j.econmod.2016.08.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999316302243
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2016.08.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Frankel, Jeffrey A. & Vegh, Carlos A. & Vuletin, Guillermo, 2013. "On graduation from fiscal procyclicality," Journal of Development Economics, Elsevier, vol. 100(1), pages 32-47.
    2. Ojeda-Joya, Jair N. & Parra-Polanía, Julián A. & Vargas, Carmiña O., 2016. "Fiscal rules as a response to commodity shocks: A welfare analysis of the Colombian scenario," Economic Modelling, Elsevier, vol. 52(PB), pages 859-866.
    3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    4. Stephanie Schmitt-Grohé & Martín Uribe, 2015. "How Important Are Terms Of Trade Shocks?," NBER Working Papers 21253, National Bureau of Economic Research, Inc.
    5. Ruy Lama & Juan Pablo Medina, 2012. "Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 5-46, March.
    6. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.
    7. Corbo, Vittorio & Schmidt-Hebbel, Klaus, 1991. "Public policies and saving in developing countries," Journal of Development Economics, Elsevier, vol. 36(1), pages 89-115, July.
    8. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
    9. Garcia, Carlos J. & Restrepo, Jorge E. & Tanner, Evan, 2011. "Fiscal rules in a volatile world: A welfare-based approach," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 649-676, July.
    10. Carlos A. Vegh & Guillermo Vuletin, 2013. "Overcoming the Fear of Free Falling: Monetary Policy Graduation in Emerging Markets," World Scientific Book Chapters, in: Douglas D Evanoff & Cornelia Holthausen & George G Kaufman & Manfred Kremer (ed.), The Role of Central Banks in Financial Stability How Has It Changed?, chapter 6, pages 105-129, World Scientific Publishing Co. Pte. Ltd..
    11. García-Cicco, Javier & Kawamura, Enrique, 2015. "Dealing with the Dutch disease: Fiscal rules and macro-prudential policies," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 205-239.
    12. Klaus Schmidt-Hebbel & Matías Tapia, 2002. "Monetary Policy Implementation and Results in Twenty Inflation-Targeting Countries," Working Papers Central Bank of Chile 166, Central Bank of Chile.
    13. Ricardo J Caballero & Guido Lorenzoni, 2014. "Persistent Appreciations and Overshooting: A Normative Analysis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(1), pages 1-47, April.
    14. Michael Kumhof & Douglas Laxton, 2010. "Chile’s Structural Fiscal Surplus Rule: a Model-Based Evaluation," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 13(3), pages 5-32, December.
    15. Juan Pablo Medina & Claudio Soto, 2007. "The Chilean Business Cycles Through the Lens of a Stochastic General Equilibrium Model," Working Papers Central Bank of Chile 457, Central Bank of Chile.
    16. Alejandro Drexler & Eduardo Engel & Rodrigo O. Valdés, 2001. "El cobre y estrategia fiscal óptima para Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Felipe Morandé & Rodrigo Vergara & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Edit (ed.),Análisis Empírico del Ahorro en Chile, edition 1, volume 1, chapter 9, pages 263-280, Central Bank of Chile.
    17. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    18. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March.
    19. Jorge Fornero & Markus Kirchner, 2018. "Learning about Commodity Cycles and Saving-Investment Dynamics in a Commodity-Exporting Economy," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 205-262, March.
    20. Adler, Gustavo & Magud, Nicolas E., 2015. "Four decades of terms-of-trade booms: A metric of income windfall," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 162-192.
    21. J. Humberto Lopez & K. Schmidt-Hebbel & Luis Servén, 2000. "How Effective is Fiscal Policy in Raising National Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 226-238, May.
    22. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
    23. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    24. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    25. Roberto Duncan, 2003. "The Harberger-Laursen-Metzler Effect Revisited: An Indirect-Utility-Function Approach," Working Papers Central Bank of Chile 250, Central Bank of Chile.
    26. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    27. Alejandra Mizala & Pilar Romaguera & Paulo Henríquez, 1998. "Oferta laboral y seguro de desempleo: Estimaciones para la economía chilena," Documentos de Trabajo 28, Centro de Economía Aplicada, Universidad de Chile.
    28. Antonio Spilimbergo, 2002. "Copper and the Chilean Economy, 1960-98," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 5(2), pages 115-126.
    29. Brieuc Monfort, 2008. "Chile: Trade Performance, Trade Liberalization, and Competitiveness," IMF Working Papers 2008/128, International Monetary Fund.
    30. García-Cicco, Javier & Kawamura, Enrique, 2015. "Dealing with the Dutch disease: Fiscal rules and macro-prudential policies," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 205-239.
    31. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.
    32. Rodrigo Fuentes S & Fabián Gredig U., 2008. "The Neutral Interest Rate: Estimates for Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(2), pages 47-58, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhandos Ybrayev & Olzhas Kubenbayev & Akylzhan Baimagambetov, 2024. "Macroeconomic effects of fiscal rules for a commodity-exporting economy: avoiding procyclical bias in Kazakhstan," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 17(2), pages 271-294, May.
    2. Vo Phuong Mai Le & Ruthira Naraidoo, 2019. "Monetary policy in a Model with Commodity and Financial Markets," Working Papers 201928, University of Pretoria, Department of Economics.
    3. Medina, Juan Pablo & Toni, Emiliano & Valdes, Rodrigo, 2023. "The Art and Science of Monetary and Fiscal Policies in Chile," MPRA Paper 117198, University Library of Munich, Germany, revised 28 Apr 2023.
    4. Andrei Polbin & Sergey Drobyshevsky, 2014. "Developing a Dynamic Stochastic Model of General Equilibrium for the Russian Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 166P, pages 156-156.
    5. Faltermeier, Julia & Lama, Ruy & Medina, Juan Pablo, 2022. "Foreign exchange intervention for commodity booms and busts," European Economic Review, Elsevier, vol. 143(C).
    6. Benjamín García & Sebastián Guarda & Markus Kirchner & Rodrigo Tranamil, 2019. "XMAS: An extended model for analysis and simulations," Working Papers Central Bank of Chile 833, Central Bank of Chile.
    7. Wieland, Volker & Cwik, Tobias & Müller, Gernot J. & Schmidt, Sebastian & Wolters, Maik, 2012. "A new comparative approach to macroeconomic modeling and policy analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 523-541.
    8. Carlos Garcia & Wildo Gonzalez, 2014. "Why does monetary policy respond to the real exchange rate in small open economies? A Bayesian perspective," Empirical Economics, Springer, vol. 46(3), pages 789-825, May.
    9. Juan Pablo Medina & Anella Munro & Claudio Soto, 2008. "What Drives the Current Account in Comodity Exporting Countries? The Cases of Chile and New Zealand," Central Banking, Analysis, and Economic Policies Book Series, in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmidt- (ed.),Current Account and External Financing, edition 1, volume 12, chapter 10, pages 369-434, Central Bank of Chile.
    10. Schmidt, Sebastian & Wieland, Volker, 2013. "The New Keynesian Approach to Dynamic General Equilibrium Modeling: Models, Methods and Macroeconomic Policy Evaluation," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1439-1512, Elsevier.
    11. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
    12. Romain Houssa & Jolan Mohimont & Chris Otrok, 2019. "A model for international spillovers to emerging markets," Working Paper Research 370, National Bank of Belgium.
    13. Lindé, Jesper & Smets, Frank & Wouters, Rafael, 2016. "Challenges for Central Banks´ Macro Models," Working Paper Series 323, Sveriges Riksbank (Central Bank of Sweden).
    14. Juan Pablo Medina & Claudio Soto, 2007. "The Chilean Business Cycles Through the Lens of a Stochastic General Equilibrium Model," Working Papers Central Bank of Chile 457, Central Bank of Chile.
    15. Vanda Almeida & Gabriela Castro & Ricardo Félix, 2010. "Improving competition in the non-tradable goods and labour markets: the Portuguese case," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 9(3), pages 163-193, December.
    16. Mumtaz, Haroon & Theodoridis, Konstantinos, 2020. "Dynamic effects of monetary policy shocks on macroeconomic volatility," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 262-282.
    17. García, Carlos J. & González, Wildo D., 2013. "Exchange rate intervention in small open economies: The role of risk premium and commodity price shocks," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 424-447.
    18. Juan Guerra-Salas, 2016. "Fiscal Policy, Sectoral Allocation, and the Skill Premium: Explaining the Decline in Latin America’s Income Inequality," Working Papers Central Bank of Chile 779, Central Bank of Chile.
    19. Belomestny, Denis & Krymova, Ekaterina & Polbin, Andrey, 2021. "Bayesian TVP-VARX models with time invariant long-run multipliers," Economic Modelling, Elsevier, vol. 101(C).
    20. Jin, Hao & Xiong, Chen, 2021. "Fiscal stress and monetary policy stance in oil-exporting countries," Journal of International Money and Finance, Elsevier, vol. 111(C).

    More about this item

    Keywords

    Commodity price; Fiscal and monetary policies; DSGE models; Business cycle;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:59:y:2016:i:c:p:335-351. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.