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October 28, 2015
Prepared for the seminar covering the book launch of “Macroeconomics, Agriculture, and Food Security” by Eugenio Díaz Bonilla
IFPRI, Washington, DC
Alejandro IzquierdoSenior Advisor
Research DepartmentIADB
Commodity Prices in Macroeconomics
Commodity prices can have substantial impacts on:
• Macroeconomic performance
• Macroeconomic vulnerabilities
Commodity Prices and Macroeconomics
Booms and Busts in Latin America: The Role of External Factors*(LAC-7; real GDP, annual growth rate)
International Financial Conditions
Commodity Prices
World Growth
External Factors
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Fitted
-4%
-2%
0%
2%
4%
6%
8%
Jun-
92
Jun-
93
Jun-
94
Jun-
95
Jun-
96
Jun-
97
Jun-
98
Jun-
99
Jun-
00
Jun-
01
Jun-
02
Jun-
03
Jun-
04
Jun-
05
Jun-
06
Jun-
07
Jun-
08
Jun-
09
Tequila Crisis
Russian Crisis
Dot-Com Crisis
Beginning of the Boom
Lehman Bankruptcy
Actual
Source: Izquierdo, A., Romero, R. and Talvi, E. (2008): “Booms and Busts in Latin America: The Role of External Factors”, IADB
Just four external variables explain 54 percent of the variance of LAC7 GDP growth
The Role of External Factors in Latin America: Estimation Results - Elasticities
1% increase in G7 Industrial Production
1% increase in TOT
100 bps increase in HY spread
100 bps increase in T-bond rate
Largest Impact on Quarterly Growth
Difference Between Shocked & Non-shocked GDP (after 20 periods)
0.6%
0.11%
-0.36%
-0.33%
2.2 points
0.74 points
-2.05 points
-1.25 points
Source: Izquierdo, A., Romero, R. and Talvi, E. (2008): “Booms and Busts in Latin America: The Role of External Factors”, IADB
Impacts on Fiscal and External AccountsLatin America during the 2003-07 Boom
Observed Fiscal Balance
-4%
-3%
-2%
-1%
0%
1%
2%
1992 1994 1996 1998 2000 2002 2004 2006
Structural Fiscal Balance
Observed and Structural Fiscal Balance
(LAC -7, % of GDP)
Observed and Adjusted Current Account
(LAC -7, % of GDP and billons of dollars)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Beginning of the Boom
-85
-65
-45
-25
-5
15
35
55
1990 1992 1994 1996 1998 2000 2002 2004 2006-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
Adjusted Current Account*
(Right Axis)
Current Account (Right Axis)
Current Account (Left Axis)
Beginning of the Boom
Bill
ons
of d
olla
rs
% o
f GD
P
* At 2002.I Terms of trade
Source: Inter-American Development Bank (2008), “All That Glitters May Not Be Gold: Assessing Latin America’s Recent Macroeconomic Performance”, Alejandro Izquierdo and Ernesto Talvi, coordinators.
rert = ( / ) CADt-1 / Zt-1
• Where Z is the absorption of tradable goods
• The pre-Sudden Stop current account balance is a key determinant of real exchange rate depreciation in the event of a Sudden Stop
• The price of tradable goods needs to become expensive enough (relative to non-tradables) so that CAD=0 holds
• This is not the actual change in the RER but the part of the total change that the country finds difficult to prevent
Impact on the Real Exchange Rate in the Event of a Sudden Stop in Capital Flows
Source: Calvo, G., Izquierdo, A. and Mejía, L.F. (2008), “Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration”, NBER Working Paper 14026
• Results suggest that the relationship between CAD and financial dollarization is highly non-linear, something that could be particularly harmful for EMs
Balance-Sheet Interactions
Prob
abili
ty o
f a su
dden
sto
p
Low dollarization
Median dollarization
High dollarization
Probability of Sudden Stop (using median values for other variables)
0.00
0.10
0.20
0.30
0.40
0.50
0.60 0.80 1.00 1.20 1.40
Omega
Larger current account deficit
Source: Calvo, G., Izquierdo, A. and Mejía, L.F. (2008), “Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration”, NBER Working Paper 14026
An Example: Estimated Sudden Stop Probabilities An Example: Estimated Sudden Stop Probabilities in Eastern Europe and Latin Americain Eastern Europe and Latin America(Based on Calvo, Izquierdo and Mejia, 2007)
Notes: Simple country averages. LAC7 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. CAC5 includes Costa Rica, Guatemala, Honduras, Nicaragua and Dominican Republic. Eastern Europe includes Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Turkey.
44.8%41.1%
58.4%
3.7%
35.2%
71.3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
LAC7 CAC5 Eastern Europe
19982008
Based on: Calvo, G., Izquierdo, A. and Mejía, L.F. (2008), “Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration”, NBER Working Paper 14026
ARG
BRA
CHL
COL
DOMMEX
PER
URY
VEN
Optimal vs. Observed Reserves (2007 vs. 2010, % of GDP)
Observed Reserves
ARG
BRA
CHL
COL
DOMMEX
PER
URY
VEN
0%
10%
20%
30%
40%
50%
60%
70%
0% 10% 20% 30% 40% 50% 60% 70%
20102007201020072010200720102007
Source: Calvo, G., Izquierdo, A., and R. Loo-Kung, “Optimal Holdings of International Reserves: Self-Insurance AgainstSudden Stop”, Monetaria (2013), Vol. 1, No. 1, and NBER Working Paper 18219, July (2012)
Optimal Reserves: Latest Update (2012)
Source: IDB 2014 Macro Report
Likelihood of a Sudden Stop: Update on Determinants
Source: IDB 2014 Macro Report and IDB estimates
2014** 9.1 12.3 -1.9 -3.3 -4.3 -2.3
** Preliminary
October 28, 2015
Prepared for the seminar covering the book launch of “Macroeconomics, Agriculture, and Food Security” by Eugenio Díaz Bonilla
IFPRI, Washington, DC
Alejandro IzquierdoSenior Advisor
Research DepartmentIADB
Commodity Prices in Macroeconomics
