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International Monetary Fund. Western Hemisphere Dept.

prices and incomes change . This chapter compares the macroeconomic adjustment in Chile, Colombia, and Peru in response to fluctuations in commodity prices. This comparison is relevant as these are commodity exporters’ emerging economies (mainly copper for Chile and Peru, and oil for Colombia) that are comparable in size and have sound macroeconomic frameworks in place, including fiscal rules and inflation-targeting regimes. 3. First, macroeconomic responses to a commodity ToT shock are estimated . Using a vector auto-regression methodology (VAR), the implications of

Mr. Ali J Al-Sadiq and Ms. Inci Ötker

Macroeconomic Performance Pre/Post Commodity Shock 8. Baseline: Impulse Responses to a 10 Percent Drop in Commodity Terms of Trade 9. Impulse Responses of Real GDP per capita Growth to a 10-percent Negative Commodity ToT Shock under Alternative Model Specifications 10. Gradual Exits to Floating through More Flexible Pegged Regimes 11. Exit Episodes Toward Greater Flexibility 12. Evolution of Key Economic Indicators Before and After the Exit to More Flexible ER Regime Boxes 1. Ingredients of a Successful Move to Exchange Rate Flexibility 2. Transitions to

Mr. Ali J Al-Sadiq and Ms. Inci Ötker
Declining commodity prices during mid-2014-2016 posed significant challenges to commodity-exporting economies. The severe terms of trade shock associated with a sharp fall in world commodity prices have raised anew questions about the viability of pegged exchange rate regimes. More recently, the COVID-19 pandemic and the measures needed to contain its spread have been associated with a significant disruption in several economic sectors, in particular, travel, tourism, and hospitality industry, adding to the downward pressure on commodity prices, a sharp fall in foreign exchange earnings, and depressed economic activity in most commodity exporters. This paper reviews country experiences with different exchange rate regimes in coping with commodity price shocks and explores the role of flexible exchange rates as a shock absorber, analyzing the macroeconomic impact of adverse term-of-trade shocks under different regimes using event study and panel vector autoregression techniques. It also analyzes, conceptually and empirically, policy and technical considerations in making exchange rate regime choices and discusses the supporting policies that should accompany a given regime choice to make that choice sustainable. It offers lessons that could be helpful to the Caribbean commodity-exporters.
Mr. Francisco Roch
This paper presents a comparative analysis of the macroeconomic adjustment in Chile, Colombia, and Peru to commodity terms-of-trade shocks. The study is done in two steps: (i) an analysis of the impulse responses of key macroeconomic variables to terms-of-trade shocks and (ii) an event study of the adjustment to the recent decline in commodity prices. The experiences of these countries highlight the importance of flexible exchange rates to help with the adjustment to lower commodity prices, and staying vigilant in addressing depreciation pressures on inflation through tightening monetary policies. On the fiscal front, evidence shows that greater fiscal space, like in Chile and Peru, gives more room for accommodating terms-of-trade shocks.
Mr. Bjoern Rother, Mr. Sebastian Sosa, Mr. Daehaeng Kim, Mr. Lukas P Kohler, Ms. Gaelle Pierre, Naoya Kato, Majdi Debbich, Chiara Castrovillari, Khamza Sharifzoda, Ms. Elizabeth Van Heuvelen, Fabiana Machado, Celine Thevenot, Ms. Pritha Mitra, and Dominique Fayad
Russia’s war in Ukraine has exacerbated food insecurity that had already been on the rise for half a decade. Low-income countries are affected the most. This note suggests that the food and fertilizer price shock would add $9 billion in 2022 and 2023 to the import bills of the 48 most affected countries. The budgetary cost of protecting vulnerable households in these countries amounts to $5–7 billion. Strong and timely action on a global scale is needed to support vulnerable households through international humanitarian assistance and domestic fiscal measures; to maintain open trade; to enhance food production and distribution; and to invest in climate-resilient agriculture. The IMF has been stepping up its engagement to help tackle the global food crisis, working closely with partners, by providing policy advice, capacity building and financing. IMF financing is a third line of defense in meeting external financing needs associated with the global food shock, which should ideally be covered by donor grants and concessional borrowing from MDBs. A new food shock window under the emergency financing instruments is expected to be approved soon to further strengthen its lending response to the food crisis.
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper presents a comparative analysis of the macroeconomic adjustment in Chile, Colombia, and Peru to commodity terms-of-trade shocks. The study is done in two steps: (1) an analysis of the impulse responses of key macroeconomic variables to terms-of-trade shocks and (2) an event study of the adjustment to the recent decline in commodity prices. The experiences of these countries highlight the importance of flexible exchange rates to help with the adjustment to lower commodity prices, and staying vigilant in addressing depreciation pressures on inflation through tightening monetary policies. On the fiscal front, evidence shows that greater fiscal space, like that of Chile and Peru, gives more room for accommodating terms-of-trade shocks.
Mr. Ali J Al-Sadiq and Ms. Inci Ötker

crawl-like arrangements as “pegged exchange rate regimes” and the rest as “floating regimes.” The distribution of exchange rate regimes between 2013–17 suggests that most commodity-exporting countries maintain pegged exchange rate regimes (Section II). 31. The PVAR impulse-response functions (IRFs) of the key macroeconomic variables support the event-study findings that adjustment following a commodity ToT shock is smoother under flexible regimes . The IRFs of real GDP per capita, real exchange rate, real government consumption, and consumer price index to a 10

Mr. Francisco Roch

macroeconomic responses to a commodity ToT shock. Using a vector auto-regression methodology (VAR), the implications of movements in the ToT (using a country-specific commodity price index) on government revenues and expenditures, GDP growth, the real effective exchange rate (REER), and the current account are analyzed. Once the relevant shocks are identified, impulse response and forecast error variance decomposition analyses are conducted. Second, we conduct an event study of the actual adjustment to the recent drop in commodity prices. In the three economies, current

Mr. Bjoern Rother, Mr. Sebastian Sosa, Mr. Daehaeng Kim, Mr. Lukas P Kohler, Ms. Gaelle Pierre, Naoya Kato, Majdi Debbich, Chiara Castrovillari, Khamza Sharifzoda, Ms. Elizabeth Van Heuvelen, Fabiana Machado, Celine Thevenot, Ms. Pritha Mitra, and Dominique Fayad

least 0.3 percent of GDP (excluding countries with a positive overall commodity ToT shock). The impact of the ToT shock on LICs differs significantly from that on MICs . The overall price shock for 2022 is higher for LICs than for MICs both in nominal terms (US$3.3 billion compared to US$1.4 billion) and as a percent of GDP (0.3 and 0.1 percent respectively). The underlying drivers of the shock are also different: MICs mostly suffer from higher fertilizer prices, whereas cereals and fertilizer price hikes contribute almost equally to the expected increase in the

International Monetary Fund. African Dept.

.892) Consensus floating ERR (dummy) 3 −2.316 * −2.311 1.121 2.652 *** −1.324 (1.297) (1.920) (0.924) (1.001) (0.938) Commodity TOT shock −0.366 *** −0.339 *** −0.481 *** −0.424 *** 0.483 ** 0.705 ** −0.348 *** −0.346 *** −0.347 *** −0.345 *** −0.196 *** −0.386 *** (0.054) (0.027) (0.075) (0.071) (0.192) (0.312) (0.026) (0.023) (0.023) (0.028) (0.072) (0.061) CTOT shock * intermediate ERR dummy 0.244 *** 0.188 0.077 0.107 0.116 0.345 0.159 0