Windfalls for All? International Elasticities and Dutch Disease in a Commodity Exporting Economy

This paper analyzes the effect of commodity price fluctuations on a commodity-exporting economy. Using Chilean and international copper market data, I find that positive copper price changes resulting from copper-specific demand shocks generate a broad GDP expansion, with no visible decline in manufacturing exports. These results provide evidence against the Dutch disease hypothesis, which posits the crowding-out effect of commodity price increases on the manufacturing sector. I then estimate a small open economy business-cycle model and find that a low degree of substitution between domestic and foreign goods explains the positive sectoral effect of a commodity price shock. Finally, I evaluate how tariffs on imports determine the volatility of total output in response to commodity price shocks, and find that lower tariffs reduce the volatility of total production when commodity prices fluctuate.