Working Paper: CEPR ID: DP15959
Authors: Markus Eberhardt; Andrea Presbitero
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.
Keywords: banking crises; commodity prices; volatility; low income countries
JEL Codes: F34; G01; Q02
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Commodity price volatility (Q02) | Banking crises (G01) |
| Commodity price volatility (Q02) | Financial instability (F65) |
| Reduced government revenues (H29) | Weaken banks' balance sheets (F65) |
| Shortened sovereign debt maturity (H63) | Weaken banks' balance sheets (F65) |
| Credit growth (E51) | Banking crises (G01) |