Effects of global liquidity and commodity market shocks in a commodity-exporting developing economy

Abstract

This paper assesses the effects and transmission mechanisms of global liquidity and commodity market shocks in Mongolia, a commodity-exporting developing economy, using a structural vector autoregression (SVAR) model. Results show that boom and bust cycles in commodity and international financial markets lead to business and financial cycles in the economy as these shocks account for 30, 45, and 60 percent of domestic output, real exchange rate, and lending rate fluctuations, respectively. Commodity demand shocks have more persistent and robust effects on domestic cycles than commodity supply shocks. Trade and financial (resource export revenues, lending rate, and exchange rate) channels are essential in transmitting the shocks. Buoyant commodity demand and global liquidity shocks lead to a significant fall in the domestic lending rate, while positive commodity supply and global liquidity shocks appreciate the real exchange rate.