The Asymmetric Effects of Commodity Price Shocks in Emerging Economies

Commodity price fluctuations are a significant driver of business cycles in Emerging Economies (EMEs). While previous works have emphasized the link between commodity prices and financial conditions, none of them has explored empirically the potentially sign-dependent effects induced by commodity price shocks on domestic macro-financial conditions. Using a non-linear panel local projections model, we show that negative commodity price shocks induce stronger and faster effects on output and investment relative to positive shocks in EMEs. The trade balance improves after a negative shock due to the tightening of domestic financial conditions whereas it is unresponsive after a positive one. The response of financial conditions, both in terms of an increase in country spreads as well as in terms of a fall in net capital flows, is thus crucial in explaining the asymmetric responses. The faster and stronger spillover from faltering - rather than surging - commodity prices to the macro-financial conditions of commodity-exporting EMEs has important implications for the designof optimal policies in EMEs.