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Commodity price risk management and fiscal policy in a sovereign default model

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  • Lopez-Martin, Bernabe
  • Leal, Julio
  • Martinez Fritscher, Andre

Abstract

Commodity prices are an important driver of fiscal policy and the business cycle in many developing and emerging market economies. We analyze a dynamic stochastic small-open-economy model of sovereign default, featuring endogenous fiscal policy and stochastic commodity revenues. The model accounts for a positive correlation of commodity revenues with government expenditures and a negative correlation with tax rates. We quantitatively document the extent to which the utilization of different financial hedging instruments by the government contributes to lowering the volatility of different macroeconomic variables and their correlation with commodity revenues. An event analysis illustrates how financial hedging instruments moderate fiscal adjustment in response to significant falls in the price of commodities. We evaluate the conditional and unconditional welfare gains for the representative household, generated by financial derivatives and commodity-indexed bonds.

Suggested Citation

  • Lopez-Martin, Bernabe & Leal, Julio & Martinez Fritscher, Andre, 2019. "Commodity price risk management and fiscal policy in a sovereign default model," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 304-323.
  • Handle: RePEc:eee:jimfin:v:96:y:2019:i:c:p:304-323
    DOI: 10.1016/j.jimonfin.2017.07.006
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Commodity price risk management and fiscal policy in a sovereign default model
      by Christian Zimmermann in NEP-DGE blog on 2017-05-03 01:33:22

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    Cited by:

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    4. van der Ploeg, Frederick, 2019. "Macro policy responses to natural resource windfalls and the crash in commodity prices," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 263-282.
    5. Troug, Haytem, 2020. "The heterogeneity among commodity-rich economies: Beyond the prices of commodities," Journal of Macroeconomics, Elsevier, vol. 66(C).
    6. Pierre JACQUET & Alexis ATLANI & Marwan LISSER, 2017. "Policy responses to terms of trade shocks," Working Papers P205, FERDI.
    7. Rick Van der Ploeg, 2016. "Macro Policy Responses To Natural Resource Windfalls," OxCarre Working Papers 178, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    8. Pierre JACQUET & Alexis ATLANI & Marwan LISSER, 2017. "Policy responses to terms of trade shocks," Working Papers P205, FERDI.
    9. Majumderad, Monoj Kumar & Raghavan, Mala & Vespignani, Joaquin L., 2021. "Impact of Commodity Price Volatility on External Debt: The Role of Exchange Rate Regimes," MPRA Paper 105269, University Library of Munich, Germany.
    10. Alok Johri & Johnny Cotoc, 2021. "The Bribe Rate and Long Run Differences in Sovereign Borrowing Costs," Department of Economics Working Papers 2021-02, McMaster University.
    11. Horvath, Jaroslav, 2018. "Business cycles, informal economy, and interest rates in emerging countries," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 96-116.

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    More about this item

    Keywords

    Commodity revenues; Hedging; Indexed bonds; Fiscal policy; Sovereign default;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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