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

Joint work with Vincent Bodart (Catholic University of Lovanio), Ivan Petrella (Collegio Carlo Alberto University of Turin & CEPR), Emiliano Santoro (Catholic University of Milan)

Abstract

In this paper, we reconsider the transmission of world interest rate shocks towards low and middle income small open economies that are highly dependent on the production and export of commodities. Through the decisions of international storers, the world price of storable commodities is inversely related to world interest rates. This relationship represents a new channel through which commodity producing countries are affected by the global financial cycle. We label this mechanism as the commodity-financial channel. We first document that countries with a higher dependence on commodity export suffer larger spillovers from US monetary policy shocks. We then build a model able to rationalize the mechanism behind this empirical evidence by using the minimum necessary ingredients characterizing small open developing countries and by including the commodity-financial channel. We show that the new transmission mechanism i) amplifies the reaction of the economy; while ii) changing qualitatively the sectoral responses and iii) the more so the higher the degree of commodity-dependence. 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.

About the speaker

Erica Perego is a researcher at Università Cattolica del Sacro Cuore di Milano in the “Economics and Finance” department. She holds a PhD in economics from the Université Catholique de Louvain and the University of Luxembourg (2014). Before joining UNICATT, she was a forecaster and researcher at CEPREMAP (2015-2017) in the Global Projection Model project joint with the IMF, she did a post-doc at the University of Evry-Val d’Essonne (Labex MME-DII, 2017-2018), and she worked as an international macro-economist at CEPII in the “Macroeconomics and International Finance” program (2018-2025). Her main research topics are international macroeconomics and international macro-finance, with a focus on developing countries. She has published her research in reviews such as the Journal of Monetary Economics and the Journal of International Money and Finance.

Language

English

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