The commodity-finance nexus: Twin boom and double whammy

Abstract

International commodity prices and capital inflows to developing countries are increasingly synchronized, subjecting commodity-dependent economies to double boom-bust cycles. On the one hand, there are a number of common monetary factors, notably international interest rates and the exchange rate of the dollar that influence commodity prices and capital inflows in the same direction. On the other hand, commodity prices and capital inflows reinforce each other through their influence on economic activity in developing countries. Capital inflows move pro-cyclically with commodity prices, aggravating both positive and negative external trade shocks. This synchronization has greatly heightened the vulnerability of commodity-dependent developing economies to global boom-bust cycles.