Clara Arroyo

Clara Arroyo

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Research fields

Macroeconomics, International Macroeconomics

Job market paper

Commodity Booms, Markup Dispersion, and Misallocation

This paper studies the effect of commodity booms on markup dispersion, misallocation, and welfare. Commodity booms are typically followed by real exchange appreciations that have heterogeneous effects on firms. Specifically, large and small firms adjust their markups differently, affecting markup dispersion and the allocation of resources in the economy. I build a quantitative two-country model with variable markups, with two channels at play. The real exchange rate appreciation that follows the boom implies tougher foreign competition on domestic producers (competition channel) but also reduces the marginal costs of firms that use imported materials (cost channel). The competition channel pushes large firms to reduce their markups and forces smaller firms to exit, while the cost channel induces large firms to increase markups. These adjustments shape the response of markup dispersion and misallocation to a commodity boom. I calibrate the model to Chile, a country that has experienced large increases in the price of its main export product, copper. I simulate a large increase in commodity prices and quantify the effect on markup dispersion, misallocation, and welfare. When commodity prices increase by 262% (as observed for copper prices in the early 2000s) markup dispersion falls in the domestic economy. Comparing the competitive equilibrium with the first best allocation, I find that the commodity boom reduces misallocation by 2.3 p.p. and welfare losses by 3.35 p.p. Finally, I provide suggestive evidence that the pattern of adjustment of domestic firms in the model is consistent with the experience of Chile during the copper boom of the early 2000s.

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