Learning about Commodity Cycles and Saving-Investment Dynamics in a Commodity-Exporting Economy

Abstract

Despite high levels of commodity prices, the current accounts of several commodity exporters have deteriorated or even reverted recently. This phenomenon is examined using a quantitative small open-economy model with a commodity sector and with imperfect information and learning about the persistence of commodity price shocks. The model predicts that during a persistent commodity price increase, agents believe at first that this increase is temporary but then revise their expectations upward as they are surprised by higher effective prices. Investment therefore expands gradually, driven by the commodity sector, while domestic savings fall, which explains the observed current account dynamics.