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Alternative instruments for smoothing the consumption of primary commodity exporters

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  • Kletzer, Kenneth M.
  • Newbery, David M.
  • Wright, Brian D.

Abstract

Countries that depend on a single primary export for their foreign earnings are likely to experience sharp fluctuations in export earnings and their underlying wealth, because of the instability of all primary commodity markets. As part of structural adjustment, several countries have liberalized their trade regimes, so domestic producers are no longer insulated from international price fluctuations. This paper concentrates on the management of country-level consumption risk, and considers actions which the government might undertake to reduce the cost of that risk. The paper reviews the costs of export price instability, with some reference to the empirical magnitudes. It considers the role of conventional instruments, including loans, price stabilization measures, and futures contracts. Particular attention is paid to the potential use of futures rollovers for longer-term price protection, and the effect of production response on that protection. The paper also discusses"commodity bonds"and dynamic consumption smoothing paths and offers conclusions.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 558.

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Date of creation: 31 Dec 1990
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Handle: RePEc:wbk:wbrwps:558

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Keywords: Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Access to Markets; Markets and Market Access;

References

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  1. Newbery, David M G & Stiglitz, Joseph E, 1982. "Optimal Commodity Stock-piling Rules," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 403-27, November.
  2. Feder, Gershon & Just, Richard E., 1977. "A study of debt servicing capacity applying logit analysis," Journal of Development Economics, Elsevier, vol. 4(1), pages 25-38, February.
  3. Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, vol. 30(3), pages 481-513, June.
    • Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
  4. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, November.
  5. Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 39-106 National Bureau of Economic Research, Inc.
  6. Kletzer, K.M. & Wright, B.D., 1990. "Sovereign Debt Renegotiation In A Consumption-Smoothing Model," Papers 610, Yale - Economic Growth Center.
  7. Albert Fishlow., 1987. "Lessons of the 1890s for the 1980s," Economics Working Papers 8724, University of California at Berkeley.
  8. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
  9. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
  10. Campbell, John Y & Mankiw, N Gregory, 1987. "Are Output Fluctuations Transitory?," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 857-80, November.
  11. Schwartz, Eduardo S, 1982. " The Pricing of Commodity-Linked Bonds," Journal of Finance, American Finance Association, vol. 37(2), pages 525-39, May.
  12. Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Development Studies.
  13. Kletzer, K.M., 1988. "Sovereign Debt Renegotiation Under Asymmetric Information," Papers 555, Yale - Economic Growth Center.
  14. Worrall, Tim, 1990. "Debt with potential repudiation," European Economic Review, Elsevier, vol. 34(5), pages 1099-1109, July.
  15. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter.
  16. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December.
  17. Carr, Peter, 1987. " A Note on the Pricing of Commodity-Linked Bonds," Journal of Finance, American Finance Association, vol. 42(4), pages 1071-76, September.
  18. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  19. Wright, Brian D & Williams, Jeffrey C, 1982. "The Economic Role of Commodity Storage," Economic Journal, Royal Economic Society, vol. 92(367), pages 596-614, September.
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Citations

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Cited by:
  1. Larson, Donald F. & Varangis, Panos & Yabuki, Nanae, 1998. "Commodity risk management and development," Policy Research Working Paper Series 1963, The World Bank.
  2. Everhart, Stephen & Duval-Hernandez, Robert, 2001. "Management of oil windfalls in Mexico : historical experience and policy options for the future," Policy Research Working Paper Series 2592, The World Bank.
  3. Alejandro Drexler & Eduardo Engel & Rodrigo O. Valdés, 2001. "El cobre y estrategia fiscal óptima para Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Felipe Morandé & Rodrigo Vergara & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Edi (ed.), Análisis Empírico del Ahorro en Chile, edition 1, volume 1, chapter 9, pages 263-280 Central Bank of Chile.

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