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.
commodities, assigning a weight based on net exports of each commodity. 4
The domestic variables of interest are public primary expenditures, public revenues, real GDP, the REER, and the current account balance. All the series are seasonally adjusted. As the data are likely to be nonstationary, all series are log-differenced except for the current account balance which is expressed as a percentage of GDP.
IV. Results from VAR Methodology
This section discusses the propagationmechanismofcommoditypriceshocks through the analysis of impulse responses, and