Learning about Commodity Cycles and Saving-Investment Dynamics in a Commodity-Exporting Economy
by Jorge Fornero and Markus Kirchner
Central Bank of Chile
Despite high levels of commodity prices, the current accounts of several commodity exporters have deteriorated or
even reverted recently. This phenomenon is examined using a quantitative small open-economy model with a commodity sector
and with imperfect information and learning about the persistence of commodity price shocks. The model predicts that
during a persistent commodity price increase, agents believe at first that this increase is temporary but then revise their
expectations upward as they are surprised by higher effective prices. Investment therefore expands gradually, driven by the
commodity sector, while domestic savings fall, which explains the observed current account dynamics.
JEL Code: E32, D80, F41.
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