Distributional Consequences of Commodity Price Shocks: Australia Over a Century

Abstract

This paper studies the distributional impact of commodity price shocks over the short and the very long run. Using a GARCH model, we find that Australia experienced more volatility than many commodity exporting developing countries over the periods 1865–1940 and 1960–2008. We conduct cointegration tests to assess the commodity price shock inequality nexus. A single equation error correction model suggests that commodity price shocks increase the income share of the top 1, 0.05, and 0.01 percent in the short run. The very top end of the income distribution benefits from commodity booms disproportionately more than the rest of the society. The short run effect is mainly driven by wool and mining and not agricultural commodities. A sustained increase in the price of renewables (wool) reduces inequality whereas the same for non-renewable resources (minerals) increases inequality. We expect that the initial distribution of land and mineral resources explains the asymmetric result.