Chinese Resource Demand or Commodity Price Shocks: Macroeconomic Effects for an Emerging Market Economy

This paper empirically addresses the hypothesis that of the external commodity based
sector, Chinese resource demand is the most important driver of emerging market
economy business cycles using Brazil as a representative case. Using a structural VAR
to examine the effects of Chinese resource demand, world commodity prices and foreign
output on domestic macroeconomic variables, we show that shocks to Chinese demand
induce an expansion in Brazilian resource exports, the non-tradeable primary commodity
sector and other domestic activity. Commodity price shocks are less favorable than
Chinese resource demand shocks. Our findings identify the important role of the interest
rate in amplifying the real effects of the commodity sector boom, in contrast to the role of
the interest rate in developed countries. By incorporating Chinese resource demand in
addition to commodity prices, commodity prices play a smaller role in explaining the
variance of domestic output than found in previous literature.