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.