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Juvenal – Unveiling the Dance of Commodity Prices and the Global Financial Cycle

2 February 2024
Publication Type: Workshop Paper
JEL Code: E32, F41, F44
Abstract

We investigate the effects of changes in commodity prices on the business cycles and capital flows of emerging market and developing economies (EMDEs). Our findings re- veal that surges in export prices, triggered by commodity price shocks, boost domestic GDP, an effect further amplified by the endogenous decline of EMBI spreads. However, the effects on capital flows appear muted. Shifts in U.S monetary policy and global risk appetite drive the global financial cycle in EMDEs. Eased global credit conditions, at- tributed to looser U.S. monetary policy or lower global risk appetite, lead to a raise in export prices, higher output, decreases in EMBI spreads, and stimulate greater capital flows. To thoroughly understand the impact of commodity price fluctuations on EMDEs’ business cycle and capital flows, it is crucial to acknowledge the significant role of global financial conditions and global economic activity in driving commodity price dynamics.

JEL Classification: F41, F44, E32
Keywords: Commodity Prices, Emerging Market and Developing Economies, Global Fi- nancial Cycle, Terms of Trade.

25 January 2024
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