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Commodity price shocks and the balance sheet effect in emerging economies

Author

Listed:
  • Alejandro Torres-García

    (Universidad EAFIT)

  • Jaime Montoya-Arbeláez

    (Universidad de Antioquia)

  • Laura Wberth-Escobar

Abstract

We study the role of commodity price shocks in explaining business cycles in emerging economies, but including a financial transmission mechanism that has been understudied in the conventional literature. A negative commodity price shock not only affects the aggregate demand but also increases a firm’s external debt and the cost of new debt. Consequently, the aggregate investment decreases, amplifying the output contraction. Using information for five Latin American commodity-exporting countries, we find that these shocks explain between 29 and 40% of output variation, supporting their importance as a source of business cycles. Moreover, the inclusion of financial variables to capture the balance sheet effect causes an overreaction of output of between 20 and 22% compared with a conventional model, verifying the importance of this mechanism.

Suggested Citation

  • Alejandro Torres-García & Jaime Montoya-Arbeláez & Laura Wberth-Escobar, 2022. "Commodity price shocks and the balance sheet effect in emerging economies," Economic Change and Restructuring, Springer, vol. 55(4), pages 2081-2110, November.
    • Handle: RePEc:kap:ecopln:v:55:y:2022:i:4:d:10.1007_s10644-021-09377-x
    DOI: 10.1007/s10644-021-09377-x
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    Cited by:

    1. Alfredo Villca & Alejandro Torres-García, 2023. "Commodity price shocks and the business cycles in emerging economies: the role of banking system balance sheets," Empirical Economics, Springer, vol. 65(5), pages 2039-2063, November.

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    More about this item

    Keywords

    Emerging economies; Commodity prices; International business cycles; Balance sheet effect;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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