The impact of commodity price shocks in a copper-rich economy: the case of Chile

Abstract

The present paper analyzes how shocks to the copper price affect the economy of Chile, the world's largest producer of this metal. Chile is an interesting case study, it being an emerging commodity producing economy that has a fiscal rule, which explicitly takes into account the expected future copper price, and has adopted an inflation targeting monetary policy with a fully floating exchange rate. The empirical analysis consists in estimating structural vector autoregressive models where the shocks are identified by sign restrictions in order to make the distinctions of those caused by increasing world demand, decreasing copper supply, and specific copper demand, e.g., speculation in future price increases. Positive copper price shocks, independently of the source, result in an appreciated currency, whereas the effects on the other macroeconomic variables do depend on the source of the shock. While demand shocks affect the Chilean gross domestic product positively, this is not the case when the copper price increases because of a supply-side event or a specific copper demand. Particularly, the activity in the mining sector is affected, while the non-mining sector expands only when the shock is caused by increasing world demand. One explanation could be the stabilizing effect of the fiscal rule. The impacts on inflation and the interest rate are correlated because of the inflation targeting monetary policy.

Fundamentals vs. Financialization during Extreme Events: From Backwardation to Contango, a Copper Market Analysis during the COVID-19 Pandemic

“…Second, it has a large influence at different economic levels, for example in rich economies, such as Chile's, and in the development of many others [51]. Third, it is one of the metals that are taking over the incipient metal super-cycle, due to the increase in needs and consumption related to the appearance of electric vehicles [52], the increase in renewable energies, and the use of electric applications in general. Given all these factors, authors such as [53] have identified a high probability of a lack of copper in the short term.…”

“…In recent times, the financialization of commodities, especially copper, has been a matter of close study and investigation, as explored in the Introduction section, and we are finding that fundamentals are also interfering in the forward price compared with spot prices. Times are approaching where analyses and statistics are suggesting there will be a lack of copper units [52,53], so we can expect this commodity to be driven increasingly by fundamentals. The development of the EV (electric vehicle) and its higher level of copper usage for fabrication, the electrification of charging points, and the development of renewable energies are causing increases in optimism and a feeling that, again, fundamentals are playing an increasingly definitive role.…”

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“…Copper prices rise in response to a rise in global demand, which is indicative of Chile's economic growth. However, supply and specific copper demand shocks have a negative impact on growth [8]. Valenta provided an up-to-date, exhaustive, multi-factor risk profile again for the future copper supply of the world by analyzing the top 308 largest undeveloped copper orebodies.…”

A Network-Based Dynamic Analysis in an Equity Stock Market

“…Among the international variables, we considered the S&P 500 Index (S&P 500) and the Chicago Board Options Exchange Market Volatility Index (VIX) [28]. Finally, since Chile is an emerging market and is a country exposed to the evolution of commodities prices, we also include the MSCI emerging market index (MSCI) and the copper (CU) and oil (Pe) prices, as they are Chile's main export and import products, respectively [29].…”