The Macroeconomic Fragility of Critical Mineral Markets
This paper applies the macroeconomic fragility framework for studying the effects of supply
chain disruptions, proposed by Acemoglu and Tahbaz-Salehi (2024), to critical minerals
markets. A key prediction of the macroeconomic fragility framework is that equilibrium supply
chains are inherently fragile, meaning that even small shocks can trigger cascading supply
chain breakdowns that can significantly magnify the discontinuous response of aggregate
supply to shocks, leading to higher volatility and prices of critical minerals. We highlight the
important role that the non-technical risk premium plays in magnifying global supply chain
shocks in the specific case of critical minerals. Using a mixed-frequency Structural VAR model
with agnostic sign restrictions and newly constructed data on non-technical risk premiums, we
estimate the impact of supply chain disruption, the non-technical risk premium and their
interaction on the prices and volatility of six critical minerals. We find that global supply chain
disruptions, magnified by non-technical risk premiums, significantly increase critical mineral
prices and price volatility for all six critical minerals studied, indicating inefficient outcomes
which we interpret as macroeconomic fragility in critical minerals markets.