Domestic linkages and the transmission of commodity price shocks

Abstract

This paper studies the role of input–output (IO) linkages in the propagation of commodity price shocks. We present empirical evidence documenting a positive correlation between commodity prices and GDP that decreases in the intensity of production linkages between the commodity sector and the rest. In a model for a small open economy, stronger linkages reduce the demand for inputs by the commodity sector, dampening the response of real GDP after a positive commodity price shock. A calibrated version of the model shows that the elasticity of GDP would be 6% lower if the commodity sector had been 5% more connected.