Exchange market pressure and primary commodity – exporting emerging markets

ABSTRACT

This paper studies short-term sensitivity between exchange market pressure and various domestic and external factors in primary commodity-exporting emerging markets. The paper focuses on the top country-commodity groups in sugar, cereal, fuels, ores and coffee during the pre-peak and post-peak commodity price periods across floating and pegged exchange rate regimes, using the price of crude oil as a general benchmark. Employing a panel model and panel VAR analysis, the paper finds the heterogeneity of response patterns unique to country-commodity groups and exchange rate regimes. According to the results, in flexible regimes, volatility occurs via the foreign exchange market, interest rates, and domestic credit cycles, feeding into the social costs for structurally weaker economies. Hard exchange-rate pegs often result in a drain on international reserves as the terms of trade deteriorate following post-price peaks, leading to unpopular depreciation. These results accentuate concerns over uneven international trade patterns, an open economy’s short-term foreign exchange policy, and speculative capital flows. Such sensitivity has broad implications for macroeconomic balance and the sustainability of implied exchange rate targets in the presence of a foreign exchange constraint across emerging markets.

KEYWORDS:

• Commodity dependence
• emerging markets
• exchange market pressure
• foreign exchange constraint

JEL CLASSIFICATION:

• E58
• F31
• F40
• F41

Acknowledgments

The author thanks participants at the American Economic Association 2017 Annual Meeting in Chicago, IL, editors of Applied Economics, Dr David Peel, and anonymous referees for comments on earlier drafts. The views expressed in the paper are solely those of the author and do not represent the views of any affiliated institutions.

Disclosure statement

No potential conflict of interest was reported by the author.