The Heterogeneity Among Commodity-Rich Economies: Beyond the Prices of Commodities

Troug, Haytem (2019): The Heterogeneity Among Commodity-Rich Economies: Beyond the Prices of Commodities.

Abstract

The existing literature has always assumed that commodity-rich countries are a homogeneous group, resulting in the generalisation of any findings obtained from a single commodity-rich economy. This paper proposes a small open economy model for a commodity-rich country and studies the triggers of business cycles for four different commodity-rich economies to highlight the existence of heterogeneity among commodity-rich economies. The model introduces government consumption in a non-separable form to the utility function. Commodities have a central role in private consumption, production of final goods, and windfalls for the domestic government. We feed the model with a variety of shocks that were previously proposed by the previous literature. The estimations of the model show that oil-rich economies are more vulnerable to external shocks than their commodity-rich counterparts. This is mainly the result of the size of commodity windfalls in the economy, as the share of oil revenues are significantly higher than the revenues of other commodities, as a ratio of output. The results also show that there exists a policy crowding out effect of fiscal policy to monetary policy in oil-rich economies, all explaining the choice of an exchange rate peg regime in most oil-rich economies.

• Item Type: MPRA Paper
• Language: English
• Keywords: New Keynesian models, Business Cycle, Open Economy Macroeconomics, Joint Analysis of Fiscal and Monetary Policy, Commodity Prices.
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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