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Erica Perego

(CEPII)

 « Macroeconomic adjustment in commodity producing countries with limited access to financial markets : the role of storage »

« Macroeconomic volatility is a fundamental concern for developing countries, in particular for com-modity exporters. In this paper we look at the macroeconomic adjustments of small open economies that produce a storable commodity to changes in the foreign interest rate. When a commodity is storable a shock in international financial markets not only has an impact via the interest rate channel but also via the price of the commodity. This additional channel comes from the fact that storable commodity prices react to changes in world interest rates as a result of investment decisions in inter-national financial markets. We extend the previous literature by including the storage mechanism in a standard model for a small low-income primary-exporter economy. We show that when commodity prices are allowed to respond endogenously to muted investment situations, the dynamics of the econ-omy are importantly amplified both under a flexible and a fixed exchange rate regime. Targeting the export price in such framework is not assuring full stabilization either. Therefore the extended model provides new insights on the macroeconomic adjustments of primary-commodity-exporting economies and calls for a reassessment of the corresponding policy prescriptions.. »