Global Commodity Cycle and Firm Debt Capacity in LAC: A Collateral Channel Perspective
Yue Zhou, Ph.D. Candidate in International EconomicsBrown Bag Lunch
The co-movement of regional economy and the global commodity price in Latin American and Caribbean (LAC) poses a natural question: how does the global financial cycle transmit to the domestic ups and downs. This paper argues the collateral channel where the uprising commodities serve as collateral to raise the debt capacity of commodity firms. We find additional 1 dollar of collateral value increases debt by 0.25 dollar. We also find that firms expand capital expenditure and inter-firm credit with the proceedings. While the dollar cycle reinforces the collateral channel, monetary policy and macro prudential policy can be used to offset the commodity shocks.