The Adjustment to Commodity Price Shocks in Chile, Colombia, and Peru
IMF Working Papers, September 29, 2017
Source details
- Canonical URL
- The Adjustment to Commodity Price Shocks in Chile, Colombia, and Peru
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Bibliographic details
- Authors: Francisco Roch
- Published: September 29, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484320648.001
Summary
- Comparative analysis of the macroeconomic adjustment in Chile, Colombia, and Peru to commodity terms-of-trade shocks.
- Study conducted in two steps:
- (i) an analysis of the impulse responses of key macroeconomic variables to terms-of-trade shocks
- (ii) an event study of the adjustment to the recent decline in commodity prices.
- Key highlight: 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.
- Fiscal finding: greater fiscal space, like in Chile and Peru, gives more room for accommodating terms-of-trade shocks.
Methodology
- Impulse response analysis of key macroeconomic variables to terms-of-trade shocks.
- Event study focused on the recent decline in commodity prices.
Main findings and evidence
- Flexible exchange rates facilitate adjustment to lower commodity prices.
- Depreciation pressures can transmit to inflation; monetary tightening is important to address such pressures.
- Countries with greater fiscal space are better able to accommodate terms-of-trade shocks; Chile and Peru cited as examples.
Policy implications and recommendations
- Maintain exchange rate flexibility to absorb terms-of-trade shocks.
- Stay vigilant on inflation risks arising from currency depreciation and consider tightening monetary policy when appropriate.
- Preserve or build fiscal space to provide room for accommodating commodity price shocks.
Content in this bundle
- The Adjustment to Commodity Price Shocks in Chile, Colombia, and Peru, WP/17/208, September 2017