Macroeconomic Consequences of Commodity Price Fluctuations in African Economies

Commodity price fluctuations pose significant challenges for macroeconomic stability in many African economies. This is so because of the heavy dependence on primary commodities for revenue and economic activity. But not all countries are affected alike. The nature of the impacts is likely to be different, depending on the structural characteristics of the economy and the policy responses. In this paper we seek to better understand the macroeconomic impacts of commodity price fluctuations on economic performance in Africa using both descriptive analysis and carefully identified structural vector autoregressions. Overall, the results show that there is heterogeneity in both the direction and magnitude of macroeconomic responses to commodity price shocks in different economies. Specifically, the policy responses to commodity price shocks in Africa have been mostly procyclical, whereas the primary aim of fiscal and monetary policy should be to follow a countercyclical stance from a Keynesian perspective. As a result of these procyclical impacts, especially for fiscal variables, we recommend the use of structurally cyclical budget rules for fiscal policy, and product price targeting rules for monetary policy in Africa's commodity republics.