Chile’s small open economy with significant mismatch between the production and consumption baskets may be represented by three stylized sectors, a commodity sector, a non-commodity tradable sector, and a non-tradable sector. This paper estimates the effect of copper price shocks on mining, manufacturing, and construction—each embodying a sector type. The empirical findings are for positive spillovers from mining to the other two sectors. However, the estimated size of the spillovers seems modest, which raises the question of the potential for mining to be better integrated with the rest of the economy.
relative prices of the goods produced in each three sectors, in a way that reflects their different trade exposure.
Channels . Three main channels shape the response of the three sectors under study to a positive copper price shock.
Global demand effects . Higher copper prices will benefit the copper exporting industry, insofar as they reflect higher global demand for copper.
Expenditure switching effects . Much of the first-round effectsofacopperpriceshock is through the real effective exchange rate. A positive copper price shock typically comes along with
the fully flexible exchange regime. The next-to-last section of the chapter simulates the effectsofacopperpriceshock on the Chilean economy using a standard dynamic stochastic general equilibrium model estimated under different policy rules. The chapter closes with some concluding remarks.
COPPER IN THE CHILEAN ECONOMY
Chile has become increasingly important in the world copper market. Since the late 1960s the Chilean economy has increased its share of global production, to somewhat more than a third ( Figure 12.1 ).
Figure 12.1 .