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Commodity prices and banking crises

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  • Eberhardt, Markus
  • Presbitero, Andrea F.

Abstract

Commodity prices are one of the most important drivers of output fluctuations in developing countries. We show that a major channel through which commodity price movements can affect the real economy is through their effect on banks' balance sheets and financial stability. Our analysis finds that the volatility of commodity prices is a significant predictor of banking crises in a sample of 60 low-income countries (LICs). In contrast to recent findings for advanced and emerging economies, credit booms and capital inflows do not play a significant role in predicting banking crises, consistent with a lack of de facto financial liberalization in LICs. We corroborate our main findings with historical data for 40 ‘peripheral’ economies between 1848 and 1938. The effect of commodity price volatility on banking crises is concentrated in LICs with a fixed exchange rate regime and a high share of primary goods in production. We also find that commodity price volatility is likely to trigger financial instability through a reduction in government revenues and a shortening of sovereign debt maturity, which are likely to weaken banks' balance sheets.

Suggested Citation

  • Eberhardt, Markus & Presbitero, Andrea F., 2021. "Commodity prices and banking crises," Journal of International Economics, Elsevier, vol. 131(C).
  • Handle: RePEc:eee:inecon:v:131:y:2021:i:c:s0022199621000519
    DOI: 10.1016/j.jinteco.2021.103474
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    13. Tölö, Eero, 2020. "Predicting systemic financial crises with recurrent neural networks," Journal of Financial Stability, Elsevier, vol. 49(C).
    14. Hamdaoui, Mekki, 2016. "Are systemic banking crises in developed and developing countries predictable?," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 114-138.
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    More about this item

    Keywords

    Banking crises; Commodity prices; Volatility; Low income countries;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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