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Mr. Fabio Comelli and Mrs. Esther Perez Ruiz
A strand of research documents Chile’s copper dependence hence significant exposure to terms of trade shocks. Copper prices’ sharp decline and forecast uncertainty since the end of the commodity super-cycle has rekindled the debate on Chile’s adjustment capacity to external shocks. Following Malz (2014), this paper builds a time-varying measure of copper price uncertainty using options contracts. VAR analysis shows that the investment response to an uncertainty shock of average magnitude in the sample is strong and persistent: the cumulative fall in investment from trend at a one-year horizon ranges 2–5.8 percentage points; and it takes between 1½ and 2 years for investment to return to its trend level. Empirical ranges depend on alternative definitions for investment, uncertainty, and options’ maturing time.
International Monetary Fund

2002) III. Forecasting Copper Prices in the Chilean Context A. Introduction B. Background: Consensus Views of the Copper Market and a Look at the Data C. Evaluation of the Accuracy of Alternative Copper Price Forecasts D. Copper Futures Prices: What is the Market Telling Us? E. Summary and Some Implications for Chile Text Tables III. 1. Comparisons of Real Copper Price Forecast Accuracy: RMSEs, Theil’s U, Diebold-Mariano Statistics 2. Forecast Accuracy of Futures Prices Relative to Random Walk Benchmark 3. LME Future-Spot Regression

International Monetary Fund

of copper. As will be seen shortly, however, it is difficult to detect a significant positive or negative trend from the historical record of (real) copper prices. At least so far, it seems that supply and demand shocks have tended to offset each other over long periods. 86. How then do industry experts go about making their own medium to long term copper price forecasts? Reflecting the above, attention focuses on the supply side, constructing a world supply curve by aggregating the individual cost curves of mines in existence or in the pipeline. Assumptions

Mr. Fabio Comelli and Mrs. Esther Perez Ruiz

adjustment capacity of the Chilean economy to external shocks. Moreover, increasing uncertainty embedded in copper price forecasts is perceived by the mining community as a key obstacle to investment decisions. 2 Figure 2. Macroeconomic Effects of Copper Prices in Chile Sources: Haver Analytics, Central Bank of Chile, and IMF Staff calculations. /1 Implied terms of trade from nominal and real exports and imports. /2 Volatility defined as the standard deviation of 10 quarter rolling window of seasonally adjusted Q/Q growth rates. Purpose . The main purpose

International Monetary Fund. Western Hemisphere Dept.

companies can claim credit from the general corporate income tax paid against the tax on repatriated profit. Therefore, the tax rate on corporate income tax ( t ir,-1 ) enters the equation with a negative sign. Technical Details on the Error Correction Model for forecasting the copper reference price 14 . Historically, the World Economic Outlook (WEO) copper price forecast tracks the copper reference price announced by the expert committee reasonably well, through a dynamic equation. To capture the relationship formally, an empirical model is fitted over the

International Monetary Fund
This Selected Issues paper examines a number of potential factors that may have influenced the short-term behavior of the exchange rate between the Chilean peso and the U.S. dollar during the period of floating exchange rate, including the possible impact of developments in Argentina during 2001. The paper investigates whether copper prices can be successfully forecasted over medium-term horizons, emphasizing the properties of copper prices most relevant in the Chilean context, including for fiscal policymaking. The paper also provides a snapshot of the Chilean banking and corporate sectors.
International Monetary Fund. Western Hemisphere Dept.
The Chilean economy is recovering from a prolonged slowdown that started with the decline in copper prices in 2011 and intensified over the past two years. The new administration, which took office in March, aims at reinvigorating investment and economic growth through structural reforms, but a divided Congress may constrain the reform space.
Mr. Jeffrey A. Frankel

forward rate nor the forecasts of the Chilean expert panel rise fully in proportion.) (x) Chile’s official budget forecasts are not overly optimistic on average. (This is presumably a major explanation of how it has achieved its structural budget targets.) Figure 10.3 . Chile’s budget balance forecast error vs. copper price forecast error Source: Author’s estimates. Figure 10.4 . Copper prices—spot, forward, and forecast, 2001–10 Source: Author’s estimates. Taken together, these results tell a coherent story. Among many countries, there is

Klaus Schmidt-Hebbel

reflects the copper price and domestic GDP cycles. The upward correction in long-term copper price forecasts (dominating the downward correction in trend GDP forecasts) and the downward adjustment in CAB targets explain the large rise of government expenditure growth, from 1.6 percent in 2003 to 17.8 percent in 2009. The average government spending increase attained 10 percent during the Bachelet administration (2006–09), when GDP growth was 2.7 percent. This large fiscal expansion was reflected in a 24.8 percent share of government expenditure in GDP in 2009, the

International Monetary Fund

some estimate of a long-run price but rather around the price expected to prevail on average over the coming years. In other words, the adjustment would be calculated using a reference price intended to represent an expected “medium-term” price. The Chilean authorities are understood to be considering an approach of this kind. The difficulties inherent in any copper price forecasting exercise would remain, but by focusing on a shorter horizon the reference price would tend to be closer to the current actual price, and the copper price adjustment used to derive the SB