Does commodity price volatility harm financial development? Evidence from developing commodity exporting countries*

Abstract This paper examines the effect of commodity price volatility on financial development in primary commodity-exporting countries. For this purpose, we collected data on 73 developing countries that are primary commodities exporters, from 2000 to 2018 and employed a two-step GMM methodology in dynamic panel data. Our results show evidence that commodity price booms promote financial development, and the volatility in commodity price negatively affects the path of financial development in developing countries. Our findings also suggest that markets are the main channel through which the volatility in commodity prices affects financial development. We then conclude that volatility in commodity prices is the main reason for the resource curse in the financial sector and not the resource abundance.