Erica Perego (CEPII)

will give a presentation on

US monetary policy spillovers to developing countries: the commodity-financial channel

Authors: Erica Perego (CEPII), Vincent Bodart (IRES, UCL), François Courtoy (European Commission)

Abstract:

As commodities are exchanged as international nancial securities, commodity prices are affected by the global financial cycle through international investors' portfolios rebalancing decisions. We label this mechanism as the commodity-nancial channel. With this evidence in mind, this paper reconsiders the macroeconomic adjustments of developing commodity-exporting countries to a US monetary policy shock, highlighting the role of this new channel. We provide a suggestive evidence that commodity-dependent economies are hit more strongly by a US monetary policy the more they are commodity-dependent, while controlling for the standard transmission channels of US monetary policy shocks. We then build a model for a low-income small open economy that is a commodity and manufacturing producer and which has a limited access to international financial markets. By increasing the degree of commodity-dependence, we show that the new transmission mechanism i) amplies more and more the reaction of the economy; while ii) changing qualitatively the sectoral responses. This suggests that commodity-dependent countries are more vulnerable to unfavourable international monetary disturbances than other small open economies. In particular, through the commodity-financial channel, even those small open economies that are disconnected from international financial markets can be affected by the global financial cycle.