Production networks and the macroeconomic impacts of commodity price shocks

Abstract

We examine the macro implications of commodity price shocks in a small open economy model with input–output linkages for a commodity-exporting small open economy. In the model, fluctuations in commodity prices have impacts on aggregate output not only through resource reallocation, currency value changes and monetary policy reaction but also through upstream and downstream input–output linkages (both domestically and with the rest of the world). We show the importance of input–output linkages as a shock transmission mechanism. We find that production linkages with the rest of the world play a significant role in amplifying the shock's aggregate impact.