Do Commodity Price Shocks Weaken the Financial Sector?

44 Pages Posted: 16 Nov 2018

See all articles by Tidiane Kinda

Tidiane Kinda

International Monetary Fund (IMF)

Montfort Mlachila

International Monetary Fund (IMF)

Rasmane Ouedraogo

Université d'Auvergne - Clermont 1, Centre d'Etudes et de Recherches sur le Developpement International (CERDI), Students

Date Written: November 2018

Abstract

This paper investigates the impact of commodity price shocks on financial sector fragility. Using a large sample of 71 commodity exporters among emerging and developing economies, it shows that negative shocks to commodity prices tend to weaken the financial sector, with larger shocks having more pronounced impacts. More specifically, negative commodity price shocks are associated with higher non‐performing loans, bank costs and banking crises, while they reduce bank profits, liquidity and provisions to non‐performing loans. These adverse effects tend to occur in countries with poor quality of governance, weak fiscal space, as well as those that do not have a sovereign wealth fund, do not implement macroprudential policies and do not have a diversified export base. These findings are robust to a battery of robustness checks.

Keywords: bank nonperforming loans, bank profits, banking crises, commodity price shocks, financial sector fragility

Suggested Citation

Kinda, Tidiane and Mlachila, Montfort and Ouedraogo, Rasmane, Do Commodity Price Shocks Weaken the Financial Sector? (November 2018). The World Economy, Vol. 41, Issue 11, pp. 3001-3044, 2018, Available at SSRN: https://ssrn.com/abstract=3285404 or http://dx.doi.org/10.1111/twec.12667

Tidiane Kinda (Contact Author)

International Monetary Fund (IMF) ( email )

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

Montfort Mlachila

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Rasmane Ouedraogo

Université d'Auvergne - Clermont 1, Centre d'Etudes et de Recherches sur le Developpement International (CERDI), Students ( email )

65 Boulevard Francois Mitterrand
63000 Clermont-Ferrand Cedex 1
France

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