Commodity Cycles and Financial Instability in Emerging Economies

Commodity exporting economies display procyclicality with the price of commodity exports. Although financial frictions may amplify commodity price shocks, how they do so for net exporters is unclear. Using Russian data from 2001-2018 we estimate a small open economy New Keynesian model with a banking system and leveraged domestic firms who issue secured debt and may default on their unsecured domestic debt. The collateral constraint and default generate financial intermediation wedges that vary endogenously over the business cycle, amplify the estimated contribution of commodity price shocks, and reduce the importance of investment and discount factor shocks. With financial frictions, optimal policy is characterized by monetary policy with a lower inflation and GDP target, but has a significant role for targeting the credit-to-GDP ratio through a combination of macroprudential tools.