Lukas Boer, Mr. Andrea Pescatori, and Martin Stuermer
The energy transition requires substantial amounts of metals such as copper, nickel, cobalt and lithium. Are these metals a key bottleneck? We identify metal-specific demand shocks, estimate supply elasticities and pin down the price impact of the energy transition in a structural scenario analysis. Metal prices would reach historical peaks for an unprecedented, sustained period in a net-zero emissions scenario. The total value of metals production would rise more than four-fold for the period 2021 to 2040, rivaling the total value of crude oil production. Metals are a potentially important input into integrated assessments models of climate change.
A strand of research documents Chile’s copper dependence hence significant exposure to terms of trade shocks. Copper prices’ sharp decline and forecast uncertainty since the end of the commodity super-cycle has rekindled the debate on Chile’s adjustment capacity to external shocks. Following Malz (2014), this paper builds a time-varying measure of copper price uncertainty using options contracts. VAR analysis shows that the investment response to an uncertainty shock of average magnitude in the sample is strong and persistent: the cumulative fall in investment from trend at a one-year horizon ranges 2–5.8 percentage points; and it takes between 1½ and 2 years for investment to return to its trend level. Empirical ranges depend on alternative definitions for investment, uncertainty, and options’ maturing time.
Major mining commodity prices are inherently volatile and cyclical. High levels of investment in China have been a key driver in the strong world demand for minerals and metals over the past decade. The urbanization and industrialization of China has been an important factor behind the increase in domestic demand and high investment growth, while its export sector is also an important source of growth and plays a critical role as a catalyst. Activity in infrastructure, construction, real estate, and automobile manufacturing all contribute to the strong demand for minerals. Over the next five years, the Chinese demand is expected to remain strong, supported by investment and gradually rising consumption rates. However, in the second part of this decade economic growth in China could slow down. For Latin American countries, export receipts should remain strong over the next five years and beyond, given the continued strong demand from China.
This paper analyzes the scope for systematic rules-based fiscal activism in open economies. Relative to a balanced budget rule, automatic stabilizers significantly improve welfare. But they minimize fiscal instrument volatility rather than business cycle volatility. A more aggressively countercyclical tax revenue gap rule increases welfare gains by around 50 percent, with only modest increases in fiscal instrument volatility. For raw materials revenue gaps the government should let automatic stabilizers work. The best fiscal instruments are targeted transfers, consumption taxes and labor taxes, or, if it enters private utility, government spending. The welfare gains are significantly lower for more open economies.
The paper analyzes Chile's structural balance fiscal rule in the face of copper price shocks originating in foreign copper demand. It uses a version of the IMF's Global Integrated Monetary and Fiscal Model (GIMF) that includes a copper sector. Two results are obtained. First, Chile's current fiscal rule performs well if the policymaker puts a small weight on output volatility (relative to inflation volatility) in his/her objective function. A more aggressive countercyclical fiscal rule can attain lower output volatility, but there is a trade-off with (somewhat) higher inflation volatility and (much) higher volatility of fiscal variables. Second, given its current stock of government assets, Chile's adoption of a 0.5% surplus target starting in 2008 is desirable from a business cycle perspective. This is because the earlier 1% target would have required significant further asset accumulation that could only have been accomplished at the expense of greater volatility in fiscal instruments and therefore in GDP.
This Selected Issues paper analyzes the properties of the fiscal surplus rule, a key pillar of Chile’s macroeconomic framework. The findings suggest that the rule is near the volatility-minimizing efficiency frontier. The paper assesses the vulnerability of the Chilean banking system to external and domestic shocks, and examines recent trade performance. The study finds that both exports and imports have been driven predominantly by demand factors. There is also some evidence that trade liberalization has contributed to the recent trade expansion, but exchange rate effects are only found to have a marginal impact.
This paper presents an update to the Report on the Observance of Standards and Codes on Fiscal Transparency for Chile. Chile has completed the first stage of the migration of its fiscal statistics to the IMF’s Government Finance Statistics Manual (GFSM 2001). A main result of this migration is the production of the operating statement, corresponding to flow transactions, for the central government, the general government, and the consolidated public enterprises. However, the treatment of interest payments on inflation-indexed bonds and on debt owed to the central bank differs from that in GFSM 2001.
In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
The paper concludes that world copper prices play an important role in short-term fluctuations and probably influence long-term growth of the Chilean economy. While many mechanisms may be at work, investment seems to play a major role. In a copper price boom, the higher copper price and associated capital inflows create upward pressure on the real exchange rate. The appreciation of the Chilean peso during the first part of the copper cycle contributes to lower inflation, which could partly explain why real wages grow more rapidly in this part of the cycle.
International Monetary Fund. External Relations Dept.
Following are edited excerpts from an address given by IMF Managing Director Michel Camdessus at the twenty-fourth annual conference of the International Organization of Securities Commissions (IOSCO) in Lisbon, Portugal, on May 25. The full text is available on the IMF’s website (http://www.imf.org).