The adjustment to commodity price shocks

This paper analyzes the macroeconomic adjustment in commodity-exporting countries to commodity price shocks. First, I estimate a heterogenous panel SVAR using data from 22 commodity-exporting economies spanning the period 1980–2017. I find that commodity terms of trade shocks are an important driver of business-cycle fluctuations: they explain around 30 percent of movements in output, contrary to the 10 percent found in recent studies. However, there is wide variation in the responses to a commodity terms of trade innovation across countries. Second, I use panel SVARs to study the role of various key country characteristics and economic policies in the macroeconomic response to these shocks. I find evidence that exchange rate flexibility, inflation targeting regimes and fiscal rules help insulate the economy from commodity price movements.