Commodity price shocks and the balance sheet effect in emerging economies

Alejandro Torres-García, Jaime Montoya-Arbeláez () and Laura Wberth-Escobar ()
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Jaime Montoya-Arbeláez: Universidad de Antioquia

Economic Change and Restructuring, 2022, vol. 55, issue 4, No 3, 2110 pages

Abstract: 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.

Keywords: Emerging economies; Commodity prices; International business cycles; Balance sheet effect (search for similar items in EconPapers)
JEL-codes: F41 F44 G15 O11 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10644-021-09377-x

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