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Can Financial Hedging Serve Macroprudential Objectives?

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  • Andrian, Leandro Gaston
  • Leon-Diaz, John
  • Rojas, Eugenio

Abstract

We examine hedging as a macroprudential tool in a Sudden Stops model of an economy exposed to commodity price fluctuations. We find that hedging commodity revenues yields significant welfare gains by stabilizing public expenditure, which heavily depends on these revenues. However, this added stability weakens precautionary motives and exacerbates the pecuniary externality that drives overborrowing in such models. As a result, hedging and traditional macroprudential policy act as complements rather than substitutes, with more ag- gressive hedging inducing a stronger macroprudential response. Our findings suggest that while hedging enhances stability and improves welfare, it does not eliminate the need for macroprudential regulation.

Suggested Citation

  • Andrian, Leandro Gaston & Leon-Diaz, John & Rojas, Eugenio, 2025. "Can Financial Hedging Serve Macroprudential Objectives?," IDB Publications (Working Papers) 14083, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:14083
    DOI: http://dx.doi.org/10.18235/0013511
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    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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