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International Monetary Fund
A two-country theoretical model is presented, showing the effects of monetary, fiscal, and supply-side disturbances on prices of primary commodities and manufactured goods, and on exchange rates. If monetary shocks dominate, then commodity prices should lead general price movements, and the level of commodity prices should be correlated with the general inflation rate. Country-specific commodity price indexes are developed for the major industrial countries. Several empirical tests broadly support the conclusions of the model. Commodity price levels tend to be cointegrated with consumer-price inflation rates. Commodity price movements contribute weakly to predictions of inflation rates but more strongly to predictions of turning points in inflation.
International Monetary Fund

, and increase the prices of the others, in all currencies. The effects on home-currency CPIs depend on the weights of the goods in the CPI. In this case the initial downward jump in the GCU commodity price also contains no signal for subsequent inflation. By using an index over a large number of commodities, individual supply shocks such as these are averaged out to some degree in the empirical work that follows. III. Country-specific Commodity Price Indexes The empirical tests developed in Sections IV and V of this paper evaluate the relationships

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.
International Monetary Fund

Front Matter Page Research Department Contents I. Introduction II. A Two-Country Model of Commodity Prices, Exchange Rates, and Inflation 1. World model of commodities and manufactures prices 2. Relative model of prices and exchange rates 3. The two models combined III. Country-specific Commodity Price Indexes IV. Evidence Pertaining to Consumer Price Inflation 1. Cointegration tests 2. Granger causality 3. In-sample predictive ability 4. Post-sample predictive ability 5. Turning points V. Evidence Pertaining to

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

International Monetary Fund. Western Hemisphere Dept.

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. 4. Second, an event study of the actual adjustment to the recent drop in commodity prices is presented . In the three economies, current account and trade deficit widened, while currencies depreciated significantly. However, despite these similar

Leandro Medina

a unique country-specific commodity price index that allows examination of changes in commodity prices and changes in commodity export shares; (ii) it exploits a comprehensive measure of public expenditure; and (iii) it analyzes the dynamic effects of commodity prices on revenues, expenditures, and GDP using vector autoregression (VAR) methodology that relies on Cholesky decomposition of matrices for the identification strategy. The novelty of this approach is that it enables me to estimate the impact of commodity price shocks on fiscal variables using a unique

Isha Agrawal, Rupa Duttagupta, and Mr. Andrea F Presbitero
We study the role of the bank-lending channel in propagating fluctuations in commodity prices to credit aggregates and economic activity in developing countries. We use data on more than 1,600 banks from 78 developing countries to analyze the transmission of changes in international commodity prices to domestic bank lending. Identification relies on a bankspecific time-varying measure of bank sensitivity to changes in commodity prices, based on daily data on bank stock prices. We find that a fall in commodity prices reduces bank lending, although this effect is confined to low-income countries and driven by commodity price busts. Banks with relatively lower deposits and poor asset quality transmit commodity price changes to lending more aggressively, supporting the hypothesis that the overall credit response to commodity prices works also through the credit supply channel. Our results also show that there is no significant difference in the behavior of foreign and domestic banks in the transmission process, reflecting the regional footprint of foreign banks in developing countries.
Isha Agrawal, Rupa Duttagupta, and Mr. Andrea F Presbitero

affect all commodity exporters (Nigeria and Ghana in this example) simultaneously. Second, our results reveal that the transmission of commodity price shocks to the banking sector is asymmetric. The positive relationship between commodity net export prices and loan growth observed in the overall sample is driven exclusively by period declining commodity prices. Our results are robust to a number of additional exercises, which use alternative sensitivity measures and country-specific commodity price indexes, expand the set of macroeconomic variables to control for the

Leandro Medina
The recent boom and bust in commodity prices has raised concerns about the impact of volatile commodity prices on Latin American countries’ fiscal positions. Using a novel quarterly data set-which includes unique country-specific commodity price indices and a comprehensive measure of public expenditures-this paper analyzes the dynamic effects of commodity price fluctuations on fiscal revenues and expenditures for eight commodity-exporting Latin American countries. The results indicate that Latin American countries’ fiscal positions react strongly to shocks to commodity prices, yet there are marked differences across countries. Fiscal variables in Venezuela display the highest sensitivity to commodity price shocks, with expenditures reacting significantly more than revenues. At the other end of the spectrum, in Chile expenditure reacts very little to commodity price fluctuations, and the dynamic responses of its fiscal indicators are very similar to those seen in high-income commodity-exporting countries. This distinct behavior across countries may relate to institutional arrangements, which in some cases include the efficient application of fiscal rules amid political commitment and high standards of transparency.