The Macroeconomic Fragility of Critical Mineral Markets

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