We study the role of the bank-lending channel in propagating fluctuations in commodity
prices to credit aggregates and economic activity in developing countries. We use data on
more than 1,600 banks from 78 developing countries to analyze the transmission of changes
in international commodity prices to domestic bank lending. Identification relies on a bankspecific
time-varying measure of bank sensitivity to changes in commodity prices, based on
daily data on bank stock prices. We find that a fall in commodity prices reduces bank
lending, although this effect is confined to low-income countries and driven by commodity
price busts. Banks with relatively lower deposits and poor asset quality transmit commodity
price changes to lending more aggressively, supporting the hypothesis that the overall credit
response to commodity prices works also through the credit supply channel. Our results also
show that there is no significant difference in the behavior of foreign and domestic banks in
the transmission process, reflecting the regional footprint of foreign banks in developing
countries.
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