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Commodity Price Risk Management and Fiscal Policy in a Sovereign Default Model

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  • López-Martín Bernabé
  • Leal-Ordoñez Julio C.
  • Martínez André

Abstract

Commodity prices are an important driver of fiscal policy and the business cycle in many developing 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.

Suggested Citation

  • López-Martín Bernabé & Leal-Ordoñez Julio C. & Martínez André, 2017. "Commodity Price Risk Management and Fiscal Policy in a Sovereign Default Model," Working Papers 2017-04, Banco de México.
  • Handle: RePEc:bdm:wpaper:2017-04
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    Cited by:

    1. Pierre JACQUET & Alexis ATLANI & Marwan LISSER, 2017. "Policy responses to terms of trade shocks," Working Papers P205, FERDI.
    2. Pierre JACQUET & Alexis ATLANI & Marwan LISSER, 2017. "Policy responses to terms of trade shocks," Working Papers P205, FERDI.
    3. van der Ploeg, Frederick, 2016. "Macro Policy Responses to Natural Resource Windfalls and the Crash in Commodity Prices," CEPR Discussion Papers 11520, C.E.P.R. Discussion Papers.
    4. repec:eee:jmacro:v:55:y:2018:i:c:p:96-116 is not listed on IDEAS

    More about this item

    Keywords

    commodity revenues; hedging; indexed bonds; fiscal policy; sovereign default;

    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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