The heterogeneity among commodity-rich economies: Beyond the prices of commodities

Commodity-rich economies share many common factors, which resulted in the generalization of any findings obtained from a single commodity-rich economy. This paper proposes a small open economy model for a commodity-rich country and studies the triggers of business cycles for four different commodity-rich economies to highlight the existence of heterogeneity among commodity-rich economies. The model introduces government consumption in a non-separable form to the utility function. Commodities have a central role in private consumption, production of final goods, and windfalls for the domestic government. We feed the model with a variety of shocks suggested by the previous literature. The estimations of the model show that oil-rich economies are more vulnerable to external shocks than their commodity-rich counterparts. The findings of the paper indicate that government spending is a significant source of heterogeneity. Also, given the relatively higher share of commodity rents when the principal commodity is oil, oil-rich countries need to adopt more prudential fiscal measures.