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Common Drivers in Emerging Market Spreads and Commodity Prices

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  • Diego Bastourre

    ()
    (Central Bank of Argentina, Universidad Nacional de La Plata)

  • Jorge Carrera

    ()
    (Central Bank of Argentina, Universidad Nacional de La Plata)

  • Javier Ibarlucia

    ()
    (Central Bank of Argentina, Universidad Nacional de La Plata)

  • Mariano Sardi

    ()
    (Central Bank of Argentina)

Abstract

This paper presents and evaluates the hypothesis that emerging countries specialized in commodity production are prone to experience non orthogonal commercial and financial shocks. Specifically, we investigate a set of global macroeconomic variables that, in principle, could simultaneously determine in opposite direction commodity prices and bonds spreads in commodity-exporting emerging economies. Employing common factors techniques and pairwise correlation analysis we find a strong negative correlation between commodity prices and emerging market spreads. Moreover, the empirical FAVAR (Factor Augmented VAR) model developed to test our main hypothesis confirms that this negative association pattern is not only explained by the fact that commodity prices are one of the most relevant fundamentals of bond spreads of commodity exporters. In particular, we find that reductions in international interest rates and global risk appetite; rises in quantitative global liquidity measures and equity returns; and US dollar depreciations, tend to diminish spreads of emerging economies and strengthen commodity prices at the same time. These results are relevant in order to improve our knowledge regarding the reasons behind some typical characteristics of emerging commodity producers, such as their tendency to experience high levels of macroeconomic volatility and procyclicality, or their propensity to be affected from exchange rate overshooting, external crisis and sudden stops. Concerning policy lessons, a mayor conclusion is the complexity of the task of disentangle challenges coming from financial openness and structural considerations in emerging economies, such as the lack of diversification of the productive structure or the difficulties of a grow strategy solely based on natural recourses. It would be profitable to internalize the connection between these two key variables in formulating and conducting economic policy.

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Bibliographic Info

Paper provided by Central Bank of Argentina, Economic Research Department in its series BCRA Working Paper Series with number 201257.

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Length: 46 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:bcr:wpaper:201257

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Related research

Keywords: commodity prices; emerging economies; financial flows; market spreads;

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References

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  2. Alessio Anzuini & Marco J. Lombardi & Patrizio Pagano, 2012. "The impact of monetary policy shocks on commodity prices," Temi di discussione (Economic working papers) 851, Bank of Italy, Economic Research and International Relations Area.
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  4. Diego Bastourre & Jorge Carrera & Javier Ibarlucia, 2010. "Commodity Prices: Structural Factors, Financial Markets and Non-Linear Dynamics," BCRA Working Paper Series 201050, Central Bank of Argentina, Economic Research Department.
  5. Breitung, Jörg & Eickmeier, Sandra, 2005. "Dynamic factor models," Discussion Paper Series 1: Economic Studies 2005,38, Deutsche Bundesbank, Research Centre.
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  14. Vansteenkiste, Isabel, 2009. "How important are common factors in driving non-fuel commodity prices? A dynamic factor analysis," Working Paper Series 1072, European Central Bank.
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  17. Mario Forni & Domenico Giannone & Marco Lippi & Lucrezia Reichlin, 2007. "Opening the Black Box: Structural Factor Models with Large Cross-Sections," Center for Economic Research (RECent) 008, University of Modena and Reggio E., Dept. of Economics.
  18. Dasgupta, Dipak & Ratha, Dilip, 2000. "What factors appear to drive private capital flows to developing countries? and how does official lending respond?," Policy Research Working Paper Series 2392, The World Bank.
  19. Diego Bastourre & Jorge Carrera & Javier Ibarlucia, 2007. "Commodity Prices In Argentina: What Does Move The Wind?," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 076, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  20. Akito Matsumoto, 2011. "Global Liquidity," IMF Working Papers 11/136, International Monetary Fund.
  21. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
  22. Brana, Sophie & Lahet, Delphine, 2010. "Determinants of capital inflows into Asia: The relevance of contagion effects as push factors," Emerging Markets Review, Elsevier, vol. 11(3), pages 273-284, September.
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