Commodity prices and business cycle in emerging economies: the role of news shocks

Abstract

It is commonly accepted in macroeconomic literature that fluctuation in commodity prices are a key source of business cycles in emerging economies. In this present work, we explore the hypothesis that some movements in commodity prices are anticipated and can trigger fluctuation in the economy in the context of a dynamic stochastic general equilibrium model. The model is a multi-sector version of a small open economy model featuring three real rigidities: internal habit formation, capital adjustment cost and working capital constraint. Moreover, the model presents two exogenous processes, one for the country-specific interest rate that can respond to commodity price level, and one for commodity prices that are composed by an unanticipated and an anticipated component. We first perform a formulation for anticipated shocks that exploits the fact that agents receive news about future fundamentals as small shocks. Then, we explore a formulation where news shocks could only trigger business cycles through changes in agents' expectation, which is called “Pigou cycles" in the macroeconomic literature . We show that the model presented in this work can generate reasonable dynamics regarding unexpected shocks in fundamentals. Moreover, the model suggest that news shocks can be a significant source of business cycles in emerging economies, helping to explain around 32% of fluctuation in output and hours worked, but only with the implicit assumption that news about future changes in commodity price can affect current level in this exogenous process.