Commodity prices shocks and the balance sheet effect in Latin America
Fecha
2018
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Universidad EAFIT
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Emerging market economies (EMEs), particularly the commodity exporter ones, are exposed 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 firm’s external debt dynamics are related to commodity prices. 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 nominal 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 half smaller than in the unrestricted model. We find no
evidence on the existence of the balance sheet effect for Chile.
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