Monetary and fiscal implications of commodity price shocks for commodityexporting small open economies

Commodity-exporting economies, such as South Africa, are susceptible to wide fluctuations in their business cycles, closely tied to commodity price fluctuations. In this research, we develop a prototype dynamic stochastic general equilibrium (DSGE) model with specific features for emerging small open commodity-exporting economies, together with investigating the implications for monetary and fiscal policies following a commodity price shock. This framework allows us to contribute to an explanation of the evolution of the macroeconomy over time following commodity price shocks, and how these are tied to macroeconomic policies. The results show that the structure of the economy and nominal rigidities, together with the wealth and borrowing cost effects to a commodity price shock can influence fiscal standing and inflation. More precisely, following a booming commodity price shock, taxes and government spending increase, and to the extent that the borrowing cost term of the country falls, higher consumption demand can generate inflationary pressures.