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© 2021 International Monetary Fund

WP/21/163

IMF Working Paper

African Department

Asymmetric Output Responses to Commodity Price Shocks¹

Prepared by James Wilson, Amine Mati, and Monique Newiak

June 2021

Abstract

This paper focuses on identifying potential asymmetric responses of non-commodity output growth in times of positive and negative commodity terms-of-trade shocks. Using a sample of 27 oil-exporting countries and a panel VAR method, the study finds: 1) the short-and medium-run response of real non-commodity GDP growth is larger for negative shocks than positive shocks; 2) this asymmetry is more pronounced in countries with weak pre-existing fundamentals–high levels of public debt and low levels of international reserves–which also serve to amplify the volatility of the response; 3) the output response to positive shocks is stronger following a sustained period of CTOT increases, while the impact of negative shocks on output are more damaging when they occur after a period of CTOT decline.

JEL Classification Numbers: E6; Q30.

Keywords: Commodity price shocks, output, asymmetric responses.

Author’s E-Mail Address: james.wilson@qeh.ox.ac.uk; amati@imf.org; mnewiak@imf.org

Contents

• Abstract

• I. Introduction

• II. Literature Survey

  • A. Macroeconomic Fundamentals

  • B. Transmission Mechanism from the Commodity Sector to the Real Economy and Asymmetry

  • C. Contribution to the Literature

• III. Data & Stylized Facts

• IV. Methodology

• V. Empirical Findings

  • A. Symmetric Shocks

  • B. Asymmetric Shocks

• VI. Robustness checks

  • A. Commodity Exporters

  • B. Time Periods

  • C. Size of Shocks

  • D. Geographical Analysis

  • E. Specification Change

• VII. Conclusion

• Appendices

  • A. Data, Definitions, and Summary Statistics

  • B. Asymmetric Response to Commodity Price Shocks by Commodity Exporters

  • C. Lag Order Test for Baseline Specification

  • D. Stationarity Tests

  • E. Exogeneity Tests

  • F. Deriving the Elasticity of Non-Commodity Real GDP to Commodity Price Changes

  • G. Variance decomposition

  • H. Robustness Check: Testing for Real Government Consumption

• Figures

  • 1. Oil Exporters: Cumulative Change in Annual Real Non-Commodity, Non-Agricultural GDP Growth, 1970–2016

  • 2. Oil Exporters: Cumulative Change in Annual Real Non-Commodity, Non-Agricultural GDP Growth, 1970–2016 – Large shocks

  • 3. Real non-commodity, non-agricultural GDP Response

  • 4. Real non-commodity, non-agricultural GDP Response (level of public debt)

  • 5. Real non-commodity, non-agricultural GDP Response (level of international reserves)

  • 6. Real non-commodity, non-agricultural GDP Response

  • 7. Real non-commodity, non-agricultural GDP Response (cumulative response)

  • 8. Real non-commodity, non-agricultural GDP Response (high debt)

  • 9. Real non-commodity, non-agricultural GDP Response (low debt)

  • 10. Real non-commodity, non-agricultural GDP Response (high reserves)

  • 11. Real non-commodity, non-agricultural GDP Response (low reserves)

  • 12. Real non-commodity, non-agricultural GDP Response (after CTOT upswing)

  • 13. Real non-commodity, non-agricultural GDP Response (after CTOT downswing)

  • 14. Real non-commodity, non-agricultural GDP Response (commodity exporters)

  • 15. Real non-commodity, non-agricultural GDP Response (non-oil commodity exporters)

  • 16. Real non-commodity, non-agricultural GDP Response (diversified commodity exporters)

  • 17. Real non-commodity, non-agricultural GDP Response (non-diversified commodity exporters)

  • 18. Real non-commodity, non-agricultural GDP Response (pre-2000)

  • 19. Real non-commodity, non-agricultural GDP -Response (post-2000)

  • 20. Real non-commodity, non-agricultural GDP Response (large CTOT shocks (>2%)

  • 21. Real non-commodity, non-agricultural GDP Response (large CTOT shocks (>5%)

  • 22. Real non-commodity, non-agricultural GDP Response (SSA oil exporters post-1990)

  • 23. Real non-commodity, non-agricultural GDP Response (Middle East & North Africa oil exporters post-1990)

  • 24. Real non-commodity, non-agricultural GDP Response (Latin America oil exporters post-1990)

  • 25. Real non-commodity, non-agricultural GDP Response (Eastern Europe & Central Asia oil exporters post-1990)

  • 26. Real non-commodity, non-agricultural GDP Response (using year fixed effects)

  • 27. Real non-commodity GDP Response