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IMF Working Paper

Western Hemisphere Department

Commodity Shocks and Exchange Rate Regimes: Implications for the Caribbean Commodity Exporters

Prepared by Ali Al-Sadiq, Pablo Bejar, and İnci Ötker1

Authorized for distribution by İnci Ötker

April 2021

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.


Declining commodity prices during mid-2014–2016 posed significant challenges to commodity-exporting economies. The severe terms of trade shock associated with a sharp fall in world commodity prices have raised anew questions about the viability of pegged exchange rate regimes. More recently, the COVID-19 pandemic and the measures needed to contain its spread have been associated with a significant disruption in several economic sectors, in particular, travel, tourism, and hospitality industry, adding to the downward pressure on commodity prices, a sharp fall in foreign exchange earnings, and depressed economic activity in most commodity exporters. This paper reviews country experiences with different exchange rate regimes in coping with commodity price shocks and explores the role of flexible exchange rates as a shock absorber, analyzing the macroeconomic impact of adverse term-of-trade shocks under different regimes using event study and panel vector autoregression techniques. It also analyzes, conceptually and empirically, policy and technical considerations in making exchange rate regime choices and discusses the supporting policies that should accompany a given regime choice to make that choice sustainable. It offers lessons that could be helpful to the Caribbean commodity-exporters.

JEL Classification Numbers: E50, F31, O24, Q02

Keywords: Exchange rate regimes, Commodity shocks, Commodity exporters, the Caribbean

Author’s E-Mail Address:,,


  • I. Introduction

  • II. Impact of the Commodity Shock and Policy Response: Stylized Facts

  • III. Empirical Analysis: Exchange Rate Flexibility as a Shock Absorber

    • A. An Event Study Approach

    • B. The PVAR Approach

  • IV. Assessing the Exchange Rate Regime Choice

  • V. Policies to Support Exchange Rate Regime Choices and Transitions

    • A. Supporting the Prevailing Pegged Exchange Rate Regime

    • B. Moving to Greater Exchange Rate Flexibility

      • What Regime to Exit to?

      • Modalities of Transition to Greater Flexibility

  • VI. Conclusions and Policy Implications

  • Tables

  • 1. The Caribbean Commodity Exporters: Key Exports

  • 2. Exchange Rate Arrangements and Monetary Policy Frameworks

  • 3. Policy Measures Taken During the 2014 Commodity Price Shock: 2014–17

  • 4. Reclassifications Based on Developments as of end-2017

  • 5. Exchange Rate Regimes of Commodity Exporting Countries, 2017

  • 6. Factors Affecting the Choice of Exchange Rate Regime for Commodity Exporters

  • 7. Determinants of Exchange Regime Choice: Empirical Results

  • 8. Detailed Country Experiences with Exit to Greater Exchange Rate Flexibility

  • Figures

  • 1. Macroeconomic Impacts of the Commodity Shock Across Regions

  • 2. Macroeconomic Impacts of the Commodity Shock Across Exchange Rate Regimes

  • 3. Macroeconomic Impacts of Commodity Shocks Across Commodity Exporters, 2010–14

  • 4. Macroeconomic Impact of the Commodity Shock across the Caribbean Commodity Exporters

  • 5. Reserves and Exchange Rates Following the Commodity Shock

  • 6a. Macroeconomic Performance Before/After the Commodity Shock: Event Study1 (Real Sector)

  • 6b. Macroeconomic Performance Before/After the Commodity Shock: Event Study1 (External Sector)

  • 6c. Macroeconomic Performance Before/After the Commodity Shock: Event Study1 (Fiscal Sector)

  • 7. Differences in Macroeconomic Performance Pre/Post Commodity Shock

  • 8. Baseline: Impulse Responses to a 10 Percent Drop in Commodity Terms of Trade

  • 9. Impulse Responses of Real GDP per capita Growth to a 10-percent Negative Commodity ToT Shock under Alternative Model Specifications

  • 10. Gradual Exits to Floating through More Flexible Pegged Regimes

  • 11. Exit Episodes Toward Greater Flexibility

  • 12. Evolution of Key Economic Indicators Before and After the Exit to More Flexible ER Regime

  • Boxes

  • 1. Ingredients of a Successful Move to Exchange Rate Flexibility

  • 2. Transitions to Greater Flexibility Through More Flexible Pegged Regimes

  • Appendices

  • I. Commodity Terms-of-Trade Index

  • II. Data Descriptions and Sources for the Choice of Exchange Rate Regimes

  • III. Sample of Countries that Switched Exchange Rate Regimes; 2013–2017

  • References


The authors are grateful for guidance and suggestions from Aasim Husain and Alejandro Werner. Input and contributions from Marcos Chamon, Thomas Dowling, Oscar Hendrick, Marie Kim, and Lulu Shui at the initial stages of this project, and helpful comments from Marco Arena, Hussein Bidawi, Paul Cashin, Nicolas Magud, and Ken Miyajima, and the Central Bank of Costa Rica are gratefully acknowledged. The paper benefitted from and draws heavily on the existing literature on this topic, including in particular the MCM Macro-Financial Note on “Commodity Price Shocks and Greater Exchange Rate Flexibility: Why, If, To What, and How

Commodity Shocks and Exchange Rate Regimes: Implications for the Caribbean Commodity Exporters
Author: Mr. Ali J Al-Sadiq and Ms. Inci Ötker