The macroeconomic effects of commodity market disruptions in open economies

This paper analyzes the macroeconomic effects of two of the principal causes of the commodity price boom in 1973-74: bad harvests and commodity speculation. The analysis uses a dynamic, fixprice-flexprice model in which exchange rates are flexible and commodities serve as both an asset and a consumption good. Commodity market disruptions of the magnitude that occurred in 1973-74 are shown to have significant effects on prices, exchange rates, trade flows, and capital flows — effects that persist long after the initial shock has passed. Asset markets, defined to include commodity markets, play a central role in transmitting these shocks throughout the world economy.