International Commodity Prices and Domestic Bank Lending in Developing Countries

45 Pages Posted: 18 Jan 2018

See all articles by Isha Agarwal

Isha Agarwal

Cornell University

Rupa Duttagupta

International Monetary Fund (IMF)

Andrea Presbitero

International Monetary Fund (IMF)

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Date Written: December 2017

Abstract

We study the role of the bank-lending channel in propagating fluctuations in commodity prices to credit aggregates and economic activity in developing countries. We use data on more than 1,600 banks from 78 developing countries to analyze the transmission of changes in international commodity prices to domestic bank lending. Identification relies on a bank specific time-varying measure of bank sensitivity to changes in commodity prices, based on daily data on bank stock prices. We find that a fall in commodity prices reduces bank lending, although this effect is confined to low-income countries and driven by commodity price busts. Banks with relatively lower deposits and poor asset quality transmit commodity price changes to lending more aggressively, supporting the hypothesis that the overall credit response to commodity prices works also through the credit supply channel. Our results also show that there is no significant difference in the behavior of foreign and domestic banks in the transmission process, reflecting the regional footprint of foreign banks in developing countries.

Keywords: Commodity prices, Developing countries, Bank lending; Commodity prices; Macro-financial linkages; Developing countries, Bank lending, Macro-financial linkages, General, International Lending and Debt Problems, Global Commodity Crises

JEL Classification: F30, F34, G21, Q02

Suggested Citation

Agarwal, Isha and Duttagupta, Rupa and Presbitero, Andrea, International Commodity Prices and Domestic Bank Lending in Developing Countries (December 2017). IMF Working Paper No. 17/279. Available at SSRN: https://ssrn.com/abstract=3104551

Isha Agarwal

Cornell University ( email )

Ithaca, NY 14853
United States

Rupa Duttagupta

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8583 (Phone)
202-589-8583 (Fax)

Andrea Presbitero (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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