Disentangling Commodity Demand, Commodity Supply, and International Liquidity Shocks on an Emerging Market

This paper examines the effects of commodity demand and supply shocks as well as
international liquidity shocks on the small open economy of Brazil using an SVAR model.
The paper highlights the importance of modeling both types of shocks in the commodity
sector. Including only commodity prices overstates the effect of commodity price shocks
on the output of Brazil. Commodity demand shocks are much larger than commodity
supply shocks in the long run. Including commodity demand and international liquidity
also reduces the impact of commodity price shocks on the interest rate made available
to Brazil in international capital markets. The interest rate channel is considered a source
of business cycles for emerging market economies in the literature.