Commodity Shocks, Uncertainty, and Sources of Business Cycles

Abstract

The thesis is a collection of three self-contained empirical essays on commodity shocks, financial market uncertainty, and the sources of business cycles in emerging market economies.

Chapter 2 discusses the role of the exchange rate as a shock absorber, often undermined in resource-rich developing countries when they face adverse shocks in global commodity prices. Focusing on Papua New Guinea, which has been grappling with a foreign currency shortage since 2013, the chapter investigates whether an exchange rate depreciation improves the trade balance while evaluating its impact on inflation. The empirical analysis, using an SVAR model and quarterly data from 1997 to 2019, indicates that the trade balance effect outweighs the inflation effect, suggesting a net benefit from currency depreciation. Moreover, the chapter identifies external shocks as the primary driver of the country's real business cycle. Since Papua New Guinea does not have a quarterly GDP measure, this chapter proposes an interpolated quarterly GDP based on key macroeconomic indicators.

Chapter 3 examines the relative importance of domestic, regional, and global shocks in the business cycles of six emerging markets in Latin America: Argentina, Brazil, Chile, Colombia, Mexico, and Peru. Using a GVAR model and quarterly data from 1999 to 2021, the chapter finds that global shocks are the primary source of output fluctuations. The finding is attributed to China's substantial influence, contributing to 20 percent of the region's output variance. Additionally, shocks to global real activity, liquidity, and commodity prices collectively account for 45 percent of the output variations over a longer forecast period. While the commodity price shock has a transitory impact on output, it greatly influences the region's exchange rates and external borrowing costs. A global monetary expansion boosts output, even when the currencies appreciate. Domestic shocks dominate contemporaneously, but their influence diminishes sharply over time. Regional shocks have a more sustained effect on Latin America's interest rate variance than its output variance.

Chapter 4 analyzes spillovers in commodity returns using daily spot prices of 24 commodities from 2006 to 2022. Commodity spillovers rose persistently during periods of economic uncertainty, such as the global financial crisis and the recent COVID-19 pandemic, and remained elevated until the end of the study period. The chapter also examines the ability of commodity spillovers to predict uncertainty in the global equity and currency markets using the Chicago Board Options Exchange implied volatility indices. The results suggest that commodity spillovers can forecast uncertainty in the U.S. equity market one week in advance and emerging equity markets three weeks in advance. Spillovers can also predict uncertainty in the euro-US$ dollar exchange rate. These predictive findings are consistent across different evaluation periods. Show more