The impact of commodity price shocks among regional economies of a developing country

Abstract

Volatile commodity prices have become commonplace in the world economy. Although is widely accepted that commodity-rich countries are affected by this phenomenon, information about how commodity price shocks impacts their regional economies is scarce. This work analyses how shocks in copper prices impact the economies of the major copper-producing regions in a developing country, such as Chile. To achieve this goal, a two-step method is implemented. First, we estimate long-term copper prices using the Wets and Rios approach (2015) and these estimates are then contrasted with those forecast by the Chilean public advisory committee. Second, a general equilibrium model is implemented to simulate the effects of both expansive and restrictive copper price cycles within major producing regions in Chile. Our results show that the proposed approach yields more homogeneous price projections than those made by the Chilean Government, which, in turn, are very close to variations in response to negative shocks. The price simulations confirm that price cycles affect the savings of government and business, which directly dampens regional production, mainly via investment, capital mobilisation and diversification of production. Because of this, fiscal revenues generated by copper sales act as a trade cycle term multiplier in regional economies. Overall, within copper-producing regions, we suggest implementing long-term policies to improve profit distribution efficiency.