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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. Rabah Arezki and Markus Bruckner

Rabah Arezki and Markus Brückner Commodity-exporting countries often experience large commodity price shocks that pose serious challenges to their macroeconomic stability. For example, the sudden influx of foreign earnings from a surge in commodity prices can increase a country’s real exchange rate (the nominal exchange rate, adjusted for inflation) and make its noncommodity exports less competitive. The effect of such unanticipated price changes on the competitiveness of commodity exporters has been studied widely by economists. There are other

International Monetary Fund. African Dept.

experiencing a large commodity price shock at the inception of the pandemic. All six CEMAC countries (Cameroon, Central African Republic, Chad, Congo, Gabon, and Equatorial Guinea) now have arrangements with the Fund or are implementing a staff-monitored program. Moreover, they have used the SDR allocation for priority spending and other budget financing due to external support shortfalls, as well as for reserve accumulation at the central bank (BEAC). The regional authorities have continued to provide policy support to CEMAC member states and implemented policies and

International Monetary Fund. Western Hemisphere Dept.

contrary, oil export-dependent economies experienced a massive shift from large budget surpluses, averaging 4½ percent of GDP in 2012, to deficits of 10¼ percent of GDP in 2015. In heavily commodity-dependent economies, large commodity price shocks can also trigger problems in other vulnerable sectors (e.g., the financial system, especially where financial institutions have large exposures to the commodity sector), which may require faster/larger fiscal adjustment to be able to manage contingent financial liabilities. Box 1. Adjusting to Commodity Shocks: Country

International Monetary Fund. Western Hemisphere Dept.

in 2017 due to exchange rate devaluation, fiscal consolidation, and expected expansion in mining exports. Their objective is to raise and maintain international reserves at 4.2 months of imports by end 2017, which includes the Fund’s financial support and budget support from the World Bank, IDB, and Caribbean Development Bank. Monetary and exchange rate polices 14. Monetary policy will continue to target domestic price stability. Taking into account Suriname’s substantial exposure to large commodity price shocks and the capacity of CBvS and the financial

International Monetary Fund. Western Hemisphere Dept.

Peru have been different than in Colombia . While the price of copper has been declining since 2011, the oil price decline began in the second half of 2014 ( Figure 4 ). Thus, Chile and Peru are in the final stages of the adjustment process, while Colombia is in the midst of adjusting to the more recent oil price declines. Moreover, the shock that Colombia suffered was more severe in that oil prices plunged by about 40 percent in 5 quarters, whereas the price of copper took 18 quarters to decrease by 45 percent. As expected, these large commodity price shocks

Mr. Hugh Bredenkamp

frequency of external shocks is high and their direct impact on domestic inflation is large. Commodity price shocks put policymakers in the difficult position of having to choose between accommodating higher domestic inflation, potentially undermining central bank credibility, and tightening policies, which could exacerbate the negative economic impact of the price shock ( Figure 4.7 ). Figure 4.7 There Is a Strong Direct Impact from Global Food Prices on Domestic Inflation, while Second-Round Effects Are Relatively Limited Sources: IMF, World Economic Outlook

Mr. Francisco Roch

copper took 18 quarters to decrease by 45 percent. As expected, these large commodity price shocks deteriorated the ToT substantially, with Colombia experiencing the largest impact ( Figure 7 ). Thus, the contribution of the ToT to Gross National Disposable Income after the shock was negative and sizeable, especially in Colombia ( Figures 8 , 9 , and 10 ). Figure 6 Commodity Prices (Index : t=100, 4Q moving average) Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Chile and, Peru t = 2011Q1; and Colombia t = 2014Q2

Mr. Tamim Bayoumi and Mr. Francis Vitek

inflation rates across countries, this impact is dissipated by the exchange rate response which—by definition—creates a divergent effect (if one exchange rate appreciates, another needs to depreciate). In short, unless there is a large commodity price shock the external factors are unlikely to create significant comovements in inflation across countries. The expectations theory says that the long-term interest rate is the expected average value of the short-term interest rate over the term of the security plus a country-specific liquidity premium that is generally

International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper focuses on the impact of adjusting to commodity shocks in Trinidad and Tobago. With commodity resources being nonrenewable, developing a long-term strategy can help avoid unsustainable policies and ensure greater intergenerational equity. Recent country experiences highlight the benefits of precautionary buffers in smoothing fiscal adjustment process. Prudent and countercyclical fiscal policy implementation, structural reforms, and economic diversification can help contain the impact of commodity price booms and busts. Strong fiscal institutions are needed to help achieve and sustain the fiscal adjustment. Different adjustment strategies may be feasible depending on the needed size of the adjustment and country-specific circumstances. Trinidad and Tobago have faced several years of weak or negative growth on the back of terms-of-trade and energy supply shocks. A well-designed fiscal framework that considers potential uncertainties associated with commodity cycles can help improve fiscal management. Countercyclical policy implementation would help smooth the impact of commodity-induced sharp fluctuations in the economy.