Commodity prices are a key factor driving economic aggregates in developing countries, accounting for about one quarter of output fluctuations since the 1960s. A new Journal of International Economics paper investigates how commodity prices can also influence financial stability and so predict banking crises within low-income countries (LICs). They find:
A one standard deviation increase in commodity price volatility is associated with a 2.5ppt increase in the probability of a banking crisis.
Credit growth and net capital inflows, which past research identifies as leading indicators of financial instability, are found not to be predictors of banking crises.
The effect of commodity price volatility on the probability of banking crises is concentrated in countries with a dominant primary sector of production and those with a fixed exchange rate.
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