COVID-19

Revisiting the commodity curse: A financial perspective

Vol: 
CAMA Working Paper 14/2017
Author name: 
Enrique Alberola
Gianluca Benigno
Year: 
2017
Month: 
February
Abstract: 

We study the response of a three-sector commodity-exporter small open economy to a commodity price boom. When the economy has access to international borrowing and lending, a temporary commodity price boom brings about the standard wealth effect that stimulates demand and has long-run implications on the sectoral allocation of labor. If dynamic productivity gains are concentrated in the traded goods sector, the commodity boom crowds out the traded sector and delays convergence to the world technology frontier. Financial openness by stimulating current demand amplifies the crowding out effect and may even lead to a growth trap, in which no resources are allocated to the traded sector. From a normative point of view, our analysis suggests that capital account management policies could be welfare improving in those circumstances.

Updated:  27 February 2024/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Team