Working Paper: NBER ID: w23169
Authors: Enrique Alberola; Gianluca Benigno
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 labour. 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.
Keywords: Commodity Price Boom; Resource Allocation; Financial Openness; Growth Trap; Welfare Implications
JEL Codes: F32; F36; F41; F43; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Temporary commodity price boom (Q33) | Wealth effect (E21) |
| Wealth effect (E21) | Stimulated demand (E41) |
| Stimulated demand (E41) | Resource reallocation from traded sector (F16) |
| Financial openness (F30) | Amplified crowding out effect (E62) |
| Crowding out effect (E62) | Growth trap (O11) |
| Growth trap (O11) | Inhibited long-term growth (O43) |
| Temporary commodity price boom (Q33) | Delay in convergence to world technology frontier (O47) |