The Long Run Effects of Commodity Price Volatility

We study the impact of commodity terms of trade (CToT) volatility on long-term economic growth and its drivers as well as on inflation, in a sample of 118 countries over 1970-2019, including 69 commodity exporters. Our econometric approaches account for bi-directional feedback effects, cross-country heterogeneity, and cross-sectional dependences. We find that CToT volatility exerts a negative impact on long-term economic growth, mainly through lower capital accumulation. This offsets the positive impact on growth from commodity price booms (especially in resource-rich economies). Furthermore, we observe that higher CToT volatility leads to greater volatility in inflation rather than structurally higher inflation