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Do commodity price shocks weaken the financial sector?

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  • Tidiane Kinda
  • Montfort Mlachila
  • Rasmane Ouedraogo

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.

Suggested Citation

  • Tidiane Kinda & Montfort Mlachila & Rasmane Ouedraogo, 2018. "Do commodity price shocks weaken the financial sector?," The World Economy, Wiley Blackwell, vol. 41(11), pages 3001-3044, November.
    • Handle: RePEc:bla:worlde:v:41:y:2018:i:11:p:3001-3044
    DOI: 10.1111/twec.12667
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    Cited by:

    1. Bastianin, Andrea & Casoli, Chiara & Galeotti, Marzio, 2023. "The connectedness of Energy Transition Metals," Energy Economics, Elsevier, vol. 128(C).
    2. Hegerty, Scott W., 2024. "Commodity prices and domestic credit in Central and Eastern Europe: Are there asymmetric effects?," Economic Systems, Elsevier, vol. 48(1).
    3. Lin, Boqiang & Xu, Bin, 2019. "How to effectively stabilize China's commodity price fluctuations?," Energy Economics, Elsevier, vol. 84(C).
    4. Eberhardt, Markus & Presbitero, Andrea F., 2021. "Commodity prices and banking crises," Journal of International Economics, Elsevier, vol. 131(C).
    5. Vicente Rios & Beatriz Manotas-Hidalgo & Lisa Gianmoena, 2021. "Spatial Inequality, Civil Conflict and Cells: A Dynamic Spatial Probit Approach," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 2110, Departamento de Economía - Universidad Pública de Navarra.
    6. Xixi Li & Jiajun Yang & Ning Zeng, 2024. "Natural resource rent and inclusive finance: an institutional perspective," Economic Change and Restructuring, Springer, vol. 57(2), pages 1-29, April.
    7. Rasmane Ouedraogo & Montfort Mlachila & Windemanegda Sandrine Sourouema & Ali Compaoré, 2022. "The impact of conflict and political instability on banking crises in developing countries," The World Economy, Wiley Blackwell, vol. 45(6), pages 1937-1977, June.
    8. Qian, Chenqi & Zhang, Tianding & Li, Jie, 2023. "The impact of international commodity price shocks on macroeconomic fundamentals: Evidence from the US and China," Resources Policy, Elsevier, vol. 85(PB).
    9. Houssem Eddine Hamdaoui & Maite Cancelo, 2024. "The Influence of the Banking Sector on Economic Growth and Commodity Prices: A Panel Data Analysis of Spain, France, and Romania," Commodities, MDPI, vol. 3(2), pages 1-14, April.
    10. Mlachila, Montfort & Ouedraogo, Rasmané, 2020. "Financial development curse in resource-rich countries: The role of commodity price shocks," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 84-96.
    11. Kyei, Collins Baffour & Cantah, William Godfred & Junior Owusu, Peterson, 2023. "Effect of commodity prices on financial soundness; insight from adaptive market hypothesis in the Ghanaian setting," Resources Policy, Elsevier, vol. 86(PA).
    12. Kinda, Harouna & Mien, Edouard, 2024. "Does transparency pay? Natural resources, financial development and the extractive industries transparency initiative (EITI)," World Development, Elsevier, vol. 179(C).
    13. Bin Xu & Boqiang Lin, 2021. "Large fluctuations of China's commodity prices: Main sources and heterogeneous effects," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2074-2089, April.
    14. Umair Kashif & Junguo Shi & Snovia Naseem & Muhammad Ayaz & Rehan Sohail Butt & Waris Ali Khan & Mamdouh Abdulaziz Saleh Al-Faryan, 2023. "Do agricultural commodity prices asymmetrically affect the performance of value-added agriculture? Evidence from Pakistan using a NARDL model," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-9, December.

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