Copper Boom and Bust in Zambia: The Commodity-Currency Link

Using Zambia as a case study, this article presents some of the challenges that small resource-dependent economies faced during the commodity boom and the financial crisis. In particular, we investigate the implications of having a price stability mandate when the scope for countercyclical fiscal policy is constrained by limited resource revenues accruing to the budget. We show that, in Zambia, the inflation-focused monetary framework exacerbated the effects of the shocks. The framework worked in favour of currency appreciation during the copper boom, and it did not allow the accumulation of international reserves, which could have been used to respond to the currency depreciation caused by the copper bust.