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Hard Commodities Hit Harder: Global Financial Risk and Commodity Exporters

Gabriela Contreras

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: In this study, I investigate the response of commodity exporters to the global financial cycle and how it depends on the type of commodity exported. I first show that following an upsurge in global financial risk, the prices of hard commodities (such as energy, metals, and minerals) decline considerably more than soft commodities. Through a panel SVAR analysis, I compare the reactions of hard and soft commodity exporters to an unexpected increase in global financial risk. My findings reveal that hard commodity exporters experience a more significant decline in their commodity terms of trade, a higher increase in their country spread, and a more substantial reduction in output. I set up a small open economy model to explore the effects of global risk shocks on country spreads, depending on the type of commodities an economy exports. The results of this model suggest that global risk shocks are primarily transmitted through commodity prices, which means that hard commodity exporters are impacted more severely due to the composition of their exports.

Date: 2023-08
New Economics Papers: this item is included in nep-fdg, nep-ifn, nep-int and nep-opm
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