Commodity Prices Shocks and the Balance Sheet Effect in Latin America
Alejandro Torres García () and
Laura Wberth Escobar ()
Documentos de Trabajo CIEF from Universidad EAFIT
Emerging market economies(EMEs), particularly the commodity exporterones,are ex- posed to world’s dynamics through different channels. In this paper,we consider the role of (exogenous) commodity prices shocks in explaining business cycles in EMEs,by proposing a financial transmission mechanism: the balance sheet effect. Our hypothesis is that a nega- tive commodity price shock increases the firm’s external debt and the cost of the new debt. In consequence,the aggregate investment decreases amplifying the output contraction.To test it,we estimate a series of VAR models using quarterly data on corporate external debt, nominal exchange rate, EMBI+ spreads, the local currency value of external debt to nomi- nal GDP ratio and real GDP,covering the period 2000-2017. We do this for Latin America and then, we focus on five particular economies: Brazil, Chile, Colombia, Mexico and Peru. We find that balance sheets do matter and they exacerbate the output’s contraction when the commodity price shock is negative. We also find that, turning the financial channel off, the real GDP cumulative response in Latin America is smaller than in the unrestricted model. Finally, we find no evidence on the existence of the balance sheet effect for Chile.
Keywords: Emerging; EconomiesCommodity; PricesInternational; Business; Cycles; Balance; Sheet; Effect; Nominal; Exchange; Rate (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:col:000122:016362
Access Statistics for this paper
More papers in Documentos de Trabajo CIEF from Universidad EAFIT
Bibliographic data for series maintained by Centro de Investigaciones Económicas y Financieras (CIEF) ().