The Impact of Commodity Price Instability: Experiments with a General Equilibrium Model for Indonesia

Abstract

Fluctuations in international commodity prices long have been claimed to have deleterious effects on the producing countries. This claim has lead to considerable efforts to introduce international policies that might mitigate such effects, particularly by UNCTAD most notably in its Integrated Commodity Program and by the IMF in its Compensating Financing Facility. It also has led to a number of studies of its validity, primarily using cross-sectional data, but also, in fewer cases, using economy wide models for case studies.1 Little work has been undertaken, however, in evaluating the impact of commodity price instability within the theoretically consistent economy wide framework of computable general equilibrium (CGE) models, though such models have been used to explore related questions, such as the impact of an one way movement in the terms of trade and of policy options to such a movement (e.g., Dick, Gupta, Mayer, and Vincent, 1983; Gelb, 1985).