Currency crises in emerging countries: The commodity factor

Abstract

In this paper, we explore whether falls in commodity prices can explain the simultaneous occurrence of currency crises in emerging and developing countries. For our empirical analysis, we use a panel of 104 emerging and developing countries, covering the period 1970–2018. Our empirical investigation starts with an event study analysis, which reveals that currency crises in commodity dependent countries are preceded by commodity price growth 2 to 4 percentage points below normal. A second analysis, inspired by the literature on early warning systems, confirms this findings by showing that commodity price fluctuations are a key predictor of currency crises in commodity dependent countries. In addition, using Poisson regression analysis, we find that a 10% decrease in global commodity price indices leads to a rise of about 7% in the number of currency crises hitting commodity exporting countries.