Mineral price shocks on macroeconomic aggregates in a highly dependent small open economy: Evidence from Peru, 2003–2024

Abstract

The aim of this paper is to estimate the effects of a mineral price shock on macroeconomic aggregates in a small open economy that is highly dependent on mineral exports, such as Peru. The paper considers two key features of the Peruvian mining industry: its polymetallic nature and the cyclical phases of price fluctuations. The former allows for the development of a Mineral Price Index (MPI), while the latter enables the testing of structural breaks, which facilitates the use of a Time-Varying Parameter Vector Autoregressive (TVP-VAR) model. Our results indicate that a shock to the MPI has a significant effect of 11.5 % on GDP and 15.5 % on overall inflation. However, the impact varies depending on the phase of MPI fluctuations. These findings underscore the importance of having flexible policy responses to mitigate the effects of future mineral price shocks and highlight the role that mineral price fluctuations play in shaping Peru's macroeconomic performance, particularly during boom periods. This paper also contributes to filling the gap in the local empirical literature regarding these two aspects of the Peruvian mining industry.