Commodity Price Shocks and Imperfectly Credible Macroeconomic Policies in Commodity-Exporting Small Open Economies

By Juan Pablo Medina Guzman, Claudia Soto

February 13, 2014

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Juan Pablo Medina Guzman, and Claudia Soto. Commodity Price Shocks and Imperfectly Credible Macroeconomic Policies in Commodity-Exporting Small Open Economies, (USA: International Monetary Fund, 2014) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In this paper, we analyze how lack of credibility and transparency of monetary and fiscal policies undermines the effectiveness of macroeconomic policies to isolate the economy from commodity price fluctuations. We develop a general equilibrium model for a commodity-exporting economy where macro policies are conducted through rules. We show that the responses of output, aggregate demand, and inflation to an increase in commodity price are magnified when these rules are imperfectly credible and lack transparency. If policies are imperfectly credible, then transparency helps private agents to learn the systematic behavior of the autorities, reducing the effects of commodity prices shocks. Coherent with the model, we show cross-country evidence that monetary policy transparency and fiscal credibility reduce the incidence of export price volatility on output volatility. Also, our results indicate that having an explicit fiscal rule and an inflation targeting regime contribute to isolate the economy from terms of trade fluctuations.

Subject: Commodity price fluctuations, Commodity price shocks, Consumption, Fiscal policy, Inflation, National accounts, Prices

Keywords: Commodity export, Commodity price booms, Commodity price fluctuations, Commodity price growth, Commodity price movement, Commodity price shocks, Commodity prices, Consumption, Covariance terms, Exported commodities increase, Exported commodity price of the country, Fiscal policy, Fiscal policy transparency, Imperfect credibility, Incidence of commodity-price shock, Inflation, Interest rate, Monetary policy, Monetary policy credibility, Monetary policy rule, Monetary policy transparency, Price index, Windowtext 0.1pt, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/033
Stock No:

WPIEA2014033
ISBN:

9781484306390
ISSN:

1018-5941

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