The Transmission of Commodity Price Super-Cycles

155 Pages Posted: 2 May 2018 Last revised: 11 Aug 2021

See all articles by Felipe Benguria

Felipe Benguria

University of Kentucky - Gatton College of Business and Economics

Felipe Saffie

University of Virginia - Darden School of Business

Sergio Urzúa

University of Maryland

Date Written: April 2018

Abstract

We examine two key channels through which commodity price super-cycles affect the economy: a wealth channel, through which higher commodity prices increase domestic demand, and a cost channel, through which they induce wage increases. By exploiting regional variation in exposure to commodity price shocks and administrative firm-level data from Brazil, we empirically disentangle these transmission channels. We introduce a dynamic, two-region model with heterogeneous firms and workers to further quantify the mechanisms and evaluate welfare. A counterfactual economy in which commodity booms are purely endowment shocks experiences only 45% of the intersectoral labor reallocation between tradables and nontradables, and 40% of the within-tradables labor reallocation between domestic and exported production. Labor market frictions lead to persistent unemployment as the boom fades, and as a result the welfare gains obtained from a commodity super-cycle are 50% lower relative to those which would be obtained under a fully-flexible labor market.

Suggested Citation

Benguria, Felipe and Saffie, Felipe and Urzúa, Sergio, The Transmission of Commodity Price Super-Cycles (April 2018). NBER Working Paper No. w24560, Available at SSRN: https://ssrn.com/abstract=3170797

Felipe Benguria (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States

Felipe Saffie

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Sergio Urzúa

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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