Does Commodity Price Uncertainty Matter for the Cost of Credit? Evidence from Developing and Advanced Economies

In this study, we focus on the effect of commodity price uncertainty on the cost of bank credit for a broad sample of loans traced to firms operating in developing and advanced economies. Using loan level data for the 1990-2019 period, we find novel evidence that commodity price uncertainty, as estimated by a Bayesian Dynamic Factor Model, increases the cost of bank loans particularly for commodity dependent firms operating in developing countries vis-à-vis commodity dependent firms operating in advanced economies. Our results imply that commodity dependent firms operating in developing countries are more vulnerable to rising commodity price uncertainty. In a further analysis, when examining the effect of group specific commodity price uncertainty on cost of borrowing, we find that agricultural price uncertainty significantly increases the cost of credit of commodity dependent firms operating in developing economies. The above evidence provides useful policy implications, particularly, for the longevity of borrowing firms operating in developing countries as their revenues rely heavily on the uncertainty of prices of agricultural products