Commodity Prices and Labour Market Dynamics in Small Open Economies

50 Pages Posted: 12 Apr 2017

See all articles by Martin Bodenstein

Martin Bodenstein

Board of Governors of the Federal Reserve System

Gunes Kamber

Université Paris I Panthéon-Sorbonne

Christoph Thoenissen

University of Sheffield

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-04-04

Abstract

We investigate the connection between commodity price shocks and unemployment in advanced resource-rich small open economies from an empirical and theoretical perspective. Shocks to commodity prices are shown to influence labour market conditions primarily through the real exchange rate. The empirical impact of commodity price shocks is obtained from estimating a panel vector autoregression; a positive price shock is found to expand the components of GDP, to cause the real exchange rate to appreciate, and to improve labour market conditions. For every one percent increase in commodity prices, our estimates suggest a one basis point decline in the unemployment rate and at its peak a 0.3% increase in unfilled vacancies. We then match the impulse responses to a commodity price shock from a small open economy model with net commodity exports and search and matching frictions in the labour market to these empirical responses. As in the data, an increase in commodity prices raises consumption demand in the small open economy and induces a real appreciation. Facing higher relative prices for their goods, non-commodity producing firms post additional job vacancies, causing the number of matches between firms and workers to rise. As a result, unemployment falls, even if employment in the commodity-producing sector is negligible. For commodity price shocks, there is little difference between the standard Diamond (1982), Mortensen (1982), and Pissarides (1985) approach of modelling search and matching frictions and the alternating offer bargaining model suggested by Hall (2008).

Keywords: Commodity prices, Search and matching, Unemployment

JEL Classification: E44, E61, F42

Suggested Citation

Bodenstein, Martin and Kamber, Gunes and Thoenissen, Christoph, Commodity Prices and Labour Market Dynamics in Small Open Economies (2017-04-04). FEDS Working Paper No. 2017-039, Available at SSRN: https://ssrn.com/abstract=2951612 or http://dx.doi.org/10.17016/FEDS.2017.039

Martin Bodenstein (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gunes Kamber

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

Christoph Thoenissen

University of Sheffield ( email )

Elmfield, Northumberland Road
Sheffield, S10 2TU
United Kingdom

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