Commodity Price Cycles: The Perils of Mismanaging the Boom
IMF Working Papers, December 1, 2011
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Bibliographic details
- Authors: Sebastian Sosa, Gustavo Adler
- Published: December 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463926649.001
Overview
- The paper examines emerging markets' commodity dependence and the history of commodity price busts over a long term (4 decade) horizon.
- It assesses how policies can mitigate or amplify the economic impact of sharp falls in commodity prices, particularly following commodity booms.
- Emphasis is on the role of policy flexibility and quality in determining vulnerability to commodity price shocks.
Key findings
- Commodity dependence is an important factor in vulnerability to price shocks, but it is not the sole determinant of outcomes.
- A country's ultimate degree of vulnerability to commodity price shocks is to a great extent determined by the flexibility and quality of its policy framework.
- Policies implemented in the run-up to sharp terms-of-trade drops—especially when those drops are preceded by booms—play a particularly important role in outcomes.
- Specific policy and structural amplifiers of negative outcomes include:
- Limited exchange rate flexibility.
- A weak external position.
- Loose fiscal policy.
- Financial dollarization appears to act as a shock "amplifier."
Regional contrasts and trends
- Latin America:
- Characterized as one of the most vulnerable regions due to high, and rising, commodity dependence.
- Emerging Asia:
- Has evolved from being a net exporter to a net importer of commodities in the last 40 years, reducing vulnerability from commodity export dependence in that period.
- The paper highlights a stark difference in trends between Latin America and emerging Asia over the examined period.
Policy implications and recommendations
- Strengthen policy frameworks to reduce vulnerability to commodity price cycles by:
- Increasing exchange rate flexibility where appropriate to absorb external shocks.
- Improving external positions (e.g., buffers, reserves, balance-sheet management).
- Pursuing prudent fiscal policies during booms to avoid amplifying bust impacts.
- Addressing financial dollarization to reduce its role as a shock amplifier.
- Focus on policies in the boom phase to prevent excessive buildup of vulnerabilities that worsen outcomes in subsequent busts.
Subject emphasis and keywords
- Subjects: Commodities, Commodity prices, Exchange rate flexibility, Exports, Foreign exchange, International trade, Prices, Terms of trade.
- Keywords include: Asia and Pacific, Central America, commodity dependence, commodity price, Commodity prices, economic policies, Exchange rate flexibility, Exports, Global, good, net commodity exporter, price, price shock, South America, terms of trade, terms of trade shock, WP.
Sebastian Sosa and Gustavo Adler, "Commodity Price Cycles: The Perils of Mismanaging the Boom", IMF Working Papers 2011, 283 (December 1, 2011), 39 pages, DOI: https://doi.org/10.5089/9781463926649.001