Commodity prices are usually very slow to recover from adverse shocks. This is one of the reasons why it has proven so difficult either to smooth their effect or to stabilize them, and why it is sometimes argued that they should behave as if shocks were permanent. There is no reason however why countries should not find ways to protect themselves. This paper develops one practical idea on how this could be done. Our goal is not to stabilize prices, but to smooth the income of the producers. Countries, we assume, should get protection against deviation of commodity prices from a moving average of past prices. This avoids the pitfalls of past stabilization that attempted to stabilize around a single price and yet our scheme gives countries time to adjust to permanent shocks. Over a period of a 50 years time horizon, we simulate that the median cost would be worth about six months of exports.
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Find related papers by JEL classification: F34 - International Economics - - International Finance - - - International Lending and Debt Problems O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
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Cohen, Daniel & Jacquet, Pierre & Reisen, Helmut, 2007.
"Loans or Grants?,"
Working Papers
UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
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Cohen, Daniel & Jacquet, Pierre & Reisen, Helmut, 2007.
"Loans or Grants,"
CEPR Discussion Papers
6024, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted)