Description

This paper studies the role of input-output (IO) linkages in the transmission of commodity price fluctuations. Empirically, the positive correlation between commodity prices and GDP decreases in the degree of IO linkages.
In a model of a commodity-exporting economy where international markets set the commodity price, IO linkages reduce the demand for inputs by the commodity sector, dampening the level of income of the country after a positive commodity price shock. In a calibrated version of the model, the elasticity of GDP to commodity prices would be at least 7% higher if the commodity sector had been 10% less connected.