Disentangling commodity demand, commodity supply, and international liquidity shocks on an emerging market

Author name: 
Fry-McKibbin R
Souza RS

This paper examines the effects of commodity demand and supply shocks as well as international liquidity shocks on the small open economy of Brazil using an SVAR model. The paper highlights the importance of modeling both types of shocks in the commodity sector. Including only commodity prices overstates the effect of commodity price shocks on the output of Brazil. Commodity demand shocks are much larger than commodity supply shocks in the long run. Including commodity demand and international liquidity also reduces the impact of commodity price shocks on the interest rate made available to Brazil in international capital markets. The interest rate channel is considered a source of business cycles for emerging market economies in the literature.

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