Hoi Wai Cheng, Dawn Holland, Ingo Pitterle United Nations, GEMU/DPAD/DESA Project LINK Meeting 21-23 October 2015, New York
Demand-side role Direct impact on the price level and terms of trade Secondary impact on all components of demand Supply-side role Commodity as an output in commodity-producing economies Commodity as an input into production process (at least some commodities, e.g. oil)
Aggregate supply and demand Demand channels: Terms of trade/prices affects all components of demand (Consumption, Investment, Government spending, Exports, Imports). Generally net negative relationship for commodity importers, positive for exporters. May be temporary if no supply response. Supply channels: Investment in commodity sector, and so production, may be negatively related to user cost. Noncommodity production may be inversely related to price. Net impact on supply and demand may feed back through price system (output gap).
Government balance Government revenue depends on share of government revenue derived from the commodity Government expenditure depends on share of government expenditure on subsidies for the commodity and may be constrained by revenue Macro response affects both Additional challenges Maintain global consistency
Direct impact of commodity price shock Import price depends on share of commodity in import basket Export price depends on share of commodity in export basket Producer price depends on intermediate consumption of commodity, imported share of commodity consumed, price controls Consumer price depends on final consumption of commodity, imported share of commodity consumed, price controls, pass through from producer price User cost or return to investment depends on share of commodity in production
Trade prices Export price (XTD) is weighted average of commodity (WLD_COM) and non-commodity (XTD_NON) prices Import price (MTD) is weighted average of commodity (WLD_COM) and non-commodity (MTD_NON) prices a1 and a2 can be calibrated from data Calibrated from data ܯ ܥ ܦܮ כ ͳ ͳ ܦ כͳ ܦ ܯ ܥ ܦܮ כ ʹ ͳ ܦ ܯכʹ ܦ ܯ
Commodity price taken as exogenous Non-commodity import price is weighted average of other countries export prices ܦ ߙ = ܦ ܯ Calibrated from data Non-commodity export price depends on country pricing power ଵ ଵ ଵ ଵ ଵ ܦ
1.1 1.05 1 0.95 0.9 0.85 0.8 0.75 0.7 Commodity prices and exchange rates 2010M09 2010M12 2011M03 2011M06 2011M09 2011M12 2012M03 2012M06 2012M09 2012M12 2013M03 2013M06 2013M09 2013M12 2014M03 2014M06 2014M09 2014M12 2015M03 2015M06 2015M09 US$/CN$ BRENT 130 120 110 100 90 80 70 60 50 40 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Correlations between exchange rate and oil price since 2010 Russia Columbia Norway Nigeria Canada Kazakhstan Indonesia
Export price transmission Export volumes (XTR) depend on price of exported goods (XTD) relative to global competitors (price elasticity may be low for commodities(xtd_com)) Export volumes also depend on global demand (WDR), and its response to the shock. ܦ ܦ ܦ ܦܮ ଵ ଵ ܯ ܥ ܦܮ ܦܮ ଶ ଵ ଵ From XTD equation Non-commodity export price elasticity (-0.5?) Global price elasticity of commodity (-0.04?)
Global demand (WDR) is weighted average of import demand in rest of world ܯ ߚ ܦ = Calibrated from data Global competitor s price (WLD_XTD_NON) is weighted average of non-commodity export prices in rest of world ܦ ߜ = ܦ ܦܮ ஷ Calibrated from data
Import price transmission Import volumes (MTR) depend on price of imported goods (MTD) relative to domestic goods (YED) (price elasticity may be low for commodities) ଵ ܧܨ ܯ Import demand elasticity (countryspecific estimation) ܦ ܯ ܦܧ ଷ ଶ ܯ ܥ ܦ ܦܧ ܦܮ Non-commodity import price elasticity (country-specific estimation) ଶ ଵ ଶ From XTD equation Global price elasticity of commodity (as in XTR equation) Import penetration also depends on demand elasticity
Terms of trade Domestic demand (DD) depends on Gross Domestic Income (GDI), which is GDP adjusted for terms of trade: DD C GDI, other I GDI, other G GDI? GDP C I G X M GDI C I G XTR* XTD / DDD MTR* MTD/ DDD where DDD denotes the domestic demand deflator
10% rise in oil price on GDI (just t-o-t effect) % difference from base 1.20 1.00 0.80 0.60 0.40 0.20 0.00-0.20-0.40-0.18-0.12 0.01 South and East Asia Developed Latin America/Caribb 0.30 Africa 0.95 0.95 Economies in transition West Asia Equatorial Guinea Congo Brunei Kuwait Chad Gabon Angola Libya Jordan Jamaica Guyana Singapore Sierra Leone Togo -0.5-0.5-0.6-0.7-0.8-1.1 4.5 4.3 3.6 3.6 3.3 3.2 3.0 2.9-2 -1 0 1 2 3 4 5 % difference from base
Producer price transmission Producer price depends on intermediate consumption of commodity, imported share of commodity consumed, price controls Demand for intermediate consumption of commodity depends on producer price. This may affect aggregate production capacity. Consumer price depends on producer price response Export price and competitiveness may depend on producer price response
User cost transmission User cost or return to investment depends on share of commodity in production Investment in commodity sector depends on user cost of capital response.
Consumer price transmission Consumer price depends on final consumption of commodity, imported share of commodity consumed, price controls, pass through from producer price Consumption volumes depend on consumer price response.
Economies in transition Turkmenistan Uzbekistan Tajikistan Ukraine Romania Russian Federation Estonia Kazakhstan Armenia Slovak Republic Serbia Georgia Montenegro Albania Bulgaria Lithuania Slovenia Latvia Cyprus Kyrgyz Republic Czech Republic Belarus Malta Azerbaijan Bosnia and Herzegovina Poland Croatia Macedonia, FYR Hungary 0.00 0.20 0.40 0.60 0.80 1.00 1.20
Africa Zimbabwe Ghana Nigeria Cabo Verde Mozambique Malawi Angola Tunisia Botswana Sudan South Africa Namibia Swaziland Mauritania Egypt, Arab Rep. Benin Senegal Ethiopia Zambia Togo Lesotho Burundi Mali Rwanda Cote d'ivoire Cameroon Burkina Faso Sierra Leone Kenya Tanzania Congo, Rep. Madagascar Congo, Dem. Rep. Gabon Morocco Guinea Central African Republic Liberia Chad Niger Algeria Libya -0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20
Asia Thailand Afghanistan Mongolia China Indonesia Lao PDR Philippines Vietnam Jordan Bangladesh Sri Lanka Turkey Malaysia Yemen, Rep. Iran, Islamic Rep. Nepal Pakistan Cambodia Israel Singapore Bhutan India United Arab Emirates Fiji Lebanon Korea, Rep. Hong Kong SAR, China Qatar Brunei Darussalam Kuwait Oman Bahrain Saudi Arabia 0.00 0.20 0.40 0.60 0.80 1.00
Latin America and Caribbean Guyana Colombia Paraguay Suriname Grenada Dominican Republic Uruguay Chile Costa Rica Haiti Guatemala Peru Brazil Nicaragua Jamaica Cuba Panama Honduras Mexico Argentina Ecuador Bolivia Belize Venezuela, RB 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80
0.00 0.20 0.40 0.60 0.80 1.00 Developed New Zealand Greece Ireland Portugal Australia Canada Spain Luxembourg Switzerland Italy Austria Netherlands Norway United States Denmark Belgium France Germany Sweden Finland Japan United Kingdom Iceland
Terms of trade model Price pass through to domestic demand and back through trade prices GDI pass through to domestic demand (nonlinear?) Secondary price effects Capacity effects through commodity input and investment Exchange rate impact? THANK YOU!