Commodity Price Cycles and Financial Stability

38 Pages Posted: 15 Apr 2015

See all articles by Carola Moreno

Carola Moreno

Central Bank of Chile

Carlos Saavedra

Universidad Externado de Colombia

Barbara Ulloa

Central Bank of Chile

Date Written: August 2014

Abstract

Commodity exporter economies usually suffer when a boom in commodity prices ends, especially if the cycle ends abruptly. Furthermore, recent literature has highlighted the role of financial instability as either causing or aggravating financial and real crises. In this paper we look at these two aspects, and study the relationship between commodity prices, output growth and financial stability, the latter proxied by domestic credit growth. Given the asymmetry we observe in boom and bust cycles, we estimate the output cost of commodity price shocks on separate samples, with a special emphasis in emerging economies. In particular, we focus on the output cost of a commodity price reversal given the credit increase observed during a boom event. We find that, in line with previous literature, the correlation between commodity shocks and output growth decreases as economies are more open to financial markets. The novelty is that we also find that this correlation is higher when countries experience very rapid credit growth during the Upturn phase of a boom. That is, rapid credit growth -- regardless of its initial level -- exacerbates the cost of a commodity price reversal.

Keywords: Commodity Cycles, Financial Stability, Credit Boom

JEL Classification: E30, E51

Suggested Citation

Moreno, Carola and Saavedra, Carlos and Ulloa, Barbara, Commodity Price Cycles and Financial Stability (August 2014). Available at SSRN: https://ssrn.com/abstract=2594266 or http://dx.doi.org/10.2139/ssrn.2594266

Carola Moreno

Central Bank of Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

Carlos Saavedra

Universidad Externado de Colombia ( email )

Calle 12 # 1-17 este
Calle 12 0 83
Bogota D.C, Cundinamarca 3456
Colombia

Barbara Ulloa (Contact Author)

Central Bank of Chile ( email )

Agustinas 1180
Santiago, 8340454
Chile

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