Cross-border banking and the transmission of global shocks to credit cycles in developing economies: A commodity price cycles channel

The literature on the transmission of global credit market shocks to credit cycles in developing countries emphasizes the role of cross-border banking, but it seems to sidestep the important role of commodity trade. To address the gap, we hypothesize that global credit market shocks are transmitted to credit market cycles in developing economies directly through cross-border banking capital flows and indirectly through the interaction between bank capital flows and commodity price cycles. We specify plausible econometric models to represent the hypotheses, and we estimate the models using a panel sample of 74 developing countries. We uncover new robust evidence that cross-border banking capital flows directly accentuate credit cycles in developing countries. The evidence also identifies commodity price cycles as an important indirect transmission channel. We estimate that a 1 % change in the interaction term between cross-border banking capital flows and commodity price index increases credit cycles by about 4.11 basis points. Overall, these findings prompt policymakers in developing countries to pay attention to the commodity price cycles channel when designing policies to minimize vulnerability to global financial shocks. • Global credit market shocks are transmitted to credit market cycles in developing economies. • Cross-border banking capital flows directly accentuate credit cycles in developing countries. • The evidence identifies commodity price cycles as a main transmission channel.