I. Introduction Commodity exporting countries across the world have benefited largely from the commodity price boom of the last decade. Together with improved macroeconomic management, the associated terms-of-trade boom allowed many emerging market economies to strengthen their economic fundamentals markedly in many dimensions. Latin America—being an important commodity producing region—has witnessed a particularly stark transformation. These developments have fed a growing sense of complacency in the region that this time the macroeconomic response to the
the role of external factors—including terms-of-trade shocks—in driving economic growth in Latin America. However, their focus has been primarily on the effects of these shocks on real output. 2 As such, they have overlooked an important dimension of terms-of-trade booms, as the impact of these shocks on domestic income tends to be larger than on output. This aspect is key to understanding the overall economic effect of terms-of-trade variations. 3 This study offers several innovations vis-à-vis existing studies. First, it develops a simple but very informative
On the back of a sizable terms-of-trade boom, Latin America’s fundamentals have improved markedly during the last decade. This has fed a sense of complacency that this time the macroeconomic response has been indeed different. Against this background, we propose a simple metric to quantify the terms-of-trade income windfall of the recent boom, and compare it with previous episodes. We find that while the recent terms-of-trade shock is not much larger than those observed during the 1970s, the associated income windfall has been far greater. Moreover, although
Abstract
Despite some global risks, external conditions for Latin America should remain stimulative. With monetary policy in advanced economies expected to stay accommodative, external financing conditions will remain favorable. Strong demand from emerging Asian economies and the gradual recovery of advanced economies will continue to support commodity prices, benefiting exporters. The main policy challenge for most of the region is to take advantage of current conditions to continue buttressing a foundation for sustained growth. Other issues important to the region include: (i) strengthening balance sheets; (ii) understanding how changes in external conditions could impact public and external debt dynamics; and (iii) making the best use of the windfall from the recent terms-of-trade boom.