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How to Cope with Volatile Commodity Export Prices: Four Proposals

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  • Frankel, Jeffrey

    (Harvard University)

Abstract

Countries that specialize in commodities have in recent years been hit by high volatility in world prices for their exports. This paper suggests four ways that commodity-exporters can make themselves less vulnerable. (1) They can use option contracts to hedge against short-term declines in the commodity price without giving up the upside, as Mexico has shown. (2) Commodity-linked bonds can hedge longer-term risk, and often have a natural ultimate counter-party in multinational corporations that depend on the commodity as an input. (3) The well-documented pro-cyclicality of fiscal policy among commodity exporters can be reduced by insulating official forecasters against optimism bias, as Chile has shown. (4) Monetary policy can be made automatically more counter-cyclical, judged by the criterion of currency appreciation in reaction to positive terms-of-trade shocks, under either of two regimes: Peggers can add the export commodity to a currency basket (CCB, for “Currency-plus-Commodity Basket†) and others can target Nominal Income instead of the CPI.

Suggested Citation

  • Frankel, Jeffrey, 2017. "How to Cope with Volatile Commodity Export Prices: Four Proposals," Working Paper Series rwp17-033, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp17-033
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    Cited by:

    1. World Bank Group, 2018. "Commodity Markets Outlook, April 2018," World Bank Publications - Books, The World Bank Group, number 29721.
    2. Kris James Mitchener & Gonçalo Pina, 2022. "Causal Effects of Countercyclical Interest Rates: Evidence from the Classical Gold Standard," CESifo Working Paper Series 9716, CESifo.
    3. Thorsten Janus, 2020. "Terms of trade volatility, exports, and GDP," Economic Change and Restructuring, Springer, vol. 53(1), pages 25-38, February.
    4. Mendez Ramos,Fabian, 2019. "Uncertainty in Ex-Ante Poverty and Income Distribution : Insights from Output Growth and Natural Resource Country Typologies," Policy Research Working Paper Series 8841, The World Bank.
    5. Baffes,John & Kabundi,Alain Ntumba & Nagle,Peter Stephen Oliver & Ohnsorge,Franziska Lieselotte, 2018. "The role of major emerging markets in global commodity demand," Policy Research Working Paper Series 8495, The World Bank.

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    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • F00 - International Economics - - General - - - General
    • G00 - Financial Economics - - General - - - General
    • O00 - Economic Development, Innovation, Technological Change, and Growth - - General - - - General

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