Commodity Prices Shocks and Poverty in Chile

Abstract

This paper examines the local economic impact on poverty of large increases in metal-mining products prices in Chile. Using household data from 1998 to 2009, and exploiting differences in municipalities’ exposure to changes in prices, we find evidence of a reduction in poverty rates associated with the positive terms of trade shock. The differential impact of 2% for less and more exposed municipalities is quantitatively important and almost identical to the reduction in aggregate poverty between 2003 and 2009. In addition, we explore some of the mechanisms explaining the reduction in poverty. We find significant effect of higher products prices on wages and employment, especially for unskilled workers and those in metal-mining industries.