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Commodity Prices and Macroeconomic Policy Commodity Prices and Macroeconomic Policy Rodrigo Caputo Roberto Chang editors Central Bank of Chile / Banco Central de Chile COMMODITY PRICES AND MACROECONOMIC POLICY Rodrigo Caputo Roberto Chang Editors Central Bank of Chile / Banco Central de Chile BCCh Vol 22 Series on Central Banking.indb 1 01-12-15 12:08 Series on Central Banking, Analysis, and Economic Policies The Book Series on “Central Banking, Analysis, and Economic Policies” of the Central Bank of Chile publishes new research on central banking and economics in general, with special emphasis on issues and fields that are relevant to economic policies in developing economies. The volumes are published in Spanish or English. Policy usefulness, high-quality research, and relevance to Chile and other economies are the main criteria for publishing books. Most research in this Series has been conducted in or sponsored by the Central Bank of Chile. Book manuscripts are submitted to the Series editors for a review process with active participation by outside referees. The Series editors submit manuscripts for final approval to the Editorial Board of the Series and to the Board of the Central Bank of Chile. Publication in both paper and electronic format. The views and conclusions presented in the book are exclusively those of the authors and do not necessarily reflect the position of the Central Bank of Chile or its Board Members. Editors: Norman Loayza Diego Saravia Editorial Board: Ricardo J. Caballero, Massachusetts Institute of Technology Vittorio Corbo, Centro de Estudios Públicos Sebastián Edwards, University of California at Los Angeles Jordi Galí, Universitat Pompeu Fabra Gian Maria Milesi-Ferreti, International Monetary Fund Carmen Reinhart, Harvard University Andrea Repetto, Universidad Adolfo Ibáñez Andrés Solimano, Facultad Latinoamericana de Ciencias Sociales Assistant Editor: Consuelo Edwards BCCh Vol 22 Series on Central Banking.indb 2 01-12-15 12:08 COMMODITY PRICES AND MACROECONOMIC POLICY Rodrigo Caputo Roberto Chang Editors Central Bank of Chile / Banco Central de Chile Santiago, Chile BCCh Vol 22 Series on Central Banking.indb 3 01-12-15 12:08 Copyright © Banco Central de Chile 2014 Agustinas 1180 Santiago, Chile All rights reserved Published in Santiago, Chile by the Central Bank of Chile Manufactured in Chile This book series is protected under Chilean Law 17336 on intellectual property. Hence, its contents may not be copied or distributed by any means without the express permission of the Central Bank of Chile. However, fragments may be reproduced, provided that a mention is made of the source, title, and author. ISBN (Printed) 978-956-7421-50-3 ISBN (Electronic) 978-956-7421-51-0 Intellectual Property Registration 260.280 ISSN 0717-6686 (Series on Central Banking, Analysis, and Economic Policies) Production Team Editors: Rodrigo Caputo Roberto Chang Supervisor: Roberto Gillmore Copy Editor: Alan Higgins Designer: Mónica Widoycovich Proof Reader: Dionisio Vio Technical Staff: Carlos Arriagada Printer: Andros Impresores BCCh Vol 22 Series on Central Banking.indb 4 01-12-15 12:08 Contributors The articles presented in this volume are revised versions of the papers presented at the Eighteen Annual Conference of the Central Bank of Chile on Commodity Prices and Macroeconomic Policy held in Santiago on 23rd October 2014. The list of contributing authors and conference discussants follows. Contributing Authors Joshua Aizenman Markus Kirchner University of Southern Central Bank of Chile, California, Los Angeles, CA, Santiago, Chile USA and National Bureau of Economics Research, Juan Pablo Nicolini Cambridge, MA, USA Federal Reserve Bank of Minneapolis, Minneapolis, MN, Roberto Chang USA and Universidad Torcuato Rutgers University, New Di Tella, Buenos Aires, Jersey, NY, USA and National Argentina Bureau of Economics Research, Cambridge, MA, USA Daniel Riera-Crichton Bates College, Lewiston, Paul Collier ME, USA Blavatnik School of Government, Oxford University Radoslaw (Radek) Stefanski and The International Growth University of St Andrews, St Centre, Oxford, United Kingdom Andrews, Fife, Scotland and OxCarre, Oxford, United Jorge Fornero Kingdom Central Bank of Chile, Santiago, Chile Andrés Yany Central Bank of Chile, Constantino Hevia Santiago, Chile Universidad Torcuato Di Tella, Buenos Aires, Argentina BCCh Vol 22 Series on Central Banking.indb 5 01-12-15 12:08 Discussant Martin Bodenstein Andrés Fernández National University of Inter-American Development Singapore, Singapore, Bank, Washington, DC, USA Singapore Alfonso Irarrázabal César Calderón BI Norwegian School of World Bank, Economics and Norges Bank, Washington, DC, USA Oslo, Norway Rodrigo Caputo Kim Ruhl Central Bank of Chile, New York University, Santiago, Chile New York, NY, USA BCCh Vol 22 Series on Central Banking.indb 6 01-12-15 12:08 TABLE OF CONTENTS Commodity Prices and Macroeconomic Policy: An Overview Rodrigo Caputo and Roberto Chang 1 Commodity Price Fluctuations and Monetary Policy in Small Open Economies Roberto Chang 19 Monetary Policy and Dutch Disease: The Case of Price and Wage Rigidity Constantino Hevia and Juan Pablo Nicolini 51 Liquidity and Foreign Asset Management Challenges for Latin American Countries Joshua Aizenman and Daniel Riera-Crichton 91 Terms of Trade Shocks and Investment in Commodity-Exporting Economies Jorge Fornero, Markus Kirchner, and Andrés Yany 135 Government Size, Misallocation and the Resource Curse Radoslaw (Radek) Stefanski 197 Resource Revenue Management: Three Policy Clocks Paul Collier 245 BCCh Vol 22 Series on Central Banking.indb 7 01-12-15 12:09 BCCh Vol 22 Series on Central Banking.indb 8 01-12-15 12:09 COMMODITY PRICES AND MACROECONOMIC POLICY: AN OVERVIEW Rodrigo Caputo Central Bank of Chile Roberto Chang Rutgers University and NBER World commodity prices and their macroeconomic impact, especially on emerging economies, have long been a main concern in economic research. Decades ago, the Prebisch-Singer hypothesis of secularly deteriorating terms of trade (Prebisch, 1950; Singer, 1950) was the subject of intense debate and became a cornerstone of major development theories and, especially in Latin America, of influential policy approaches.1 In a related fashion, extensive literature has studied the long-run behavior of commodity prices. Although there is some controversy about the main drivers of the relative prices of commodities, there is consensus that, since the nineteenth century, four commodity “super cycles” have taken place. These super cycles have been related to strong demand associated with moments of rapid industrialization and urbanization in major areas of the world. Each of them, lasting on average 20 years, ended once the supply of commodities increased to match the growing demand (Canuto, 2014). Recent events have brought similar issues back to the top of the economics agenda. During the current commodity super cycle, which began in the late 1990s, the world economy has seen wide swings in the world prices of primary items such as oil, food, and metals. Echoing past debates, commodity prices are again posing urgent 1.Both Structuralism and Dependency Theory relied heavily of the Prebisch-Singer hypothesis. These theories, in turn, underpinned the strategy of Industralization via Import Substitution. For a recent empirical evaluation of the Prebisch-Singer hypothesis, see Aretski and others (2013). Commodity Prices and Macroeconomic Policy, edited by Rodrigo Caputo and Roberto Chang. Santiago, Chile. © 2015. Central Bank of Chile. 1 BCCh Vol 22 Series on Central Banking.indb 1 01-12-15 12:09 2 Rodrigo Caputo and Roberto Chang Figure 1. Copper Pricesa 1.50 1.25 1.00 0.75 0.50 0.25 Log copper price 0.00 World log price of copper -0.25 Long-run component -0.50 2000 2003 2006 2009 2012 2015 Months Source: Central Bank of Chile. a. Monthly data spanning January 2000 – October 2015. questions to academics and policymakers. The questions are both positive (such as, what is the impact of commodity price shocks on macroeconomic aggregates?) and normative (how should monetary and fiscal policy best react to those shocks?); they pertain to both the short run (are copper funds and other stabilization schemes a good idea?) and the long-run (should developing countries try to change their productive structures to diversify exports away from primary products?). Research on these and related issues is badly needed, particularly for emerging economies that are heavily exposed to commodity price fluctuations. To contribute to the debate, this volume gathers six studies written for the XVIII Annual Research Conference of the Central Bank of Chile. The unifying theme of the conference was to examine appropriate macroeconomic policies in light of the increased volatility of world commodity prices. The studies in this volume explore different dimensions and aspects of that theme, as well as diverse policy alternatives, instruments, and strategies. This diversity, to a large extent, reflects the many facets of the problem suggested by the raw behavior of commodity prices. To understand this, it is illustrative to glance at the data. In figure 1, the trajectory of the world price of copper since 2000 is plotted in black.2 2.The raw series is the world copper price, US$/lb, taken from the Central Bank of Chile’s website. Figure 1 shows the natural log of the price. BCCh Vol 22 Series on Central Banking.indb 2 01-12-15 12:09 Commodity Prices and Macroeconomic Policy: An Overview 3 Figure 2. Chile: Copper Prices and Real Exchange Rate over the Cycle
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