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Macro-Hedging for Commodity Exporters

  • Eduardo Borensztein
  • Damiano Sandri
  • Olivier Jeanne

This paper uses a dynamic optimization model to estimate the welfare gains of hedging against commodity price risk for commodity-exporting countries. The introduction of hedging instruments such as futures and options enhances domestic welfare through two channels. First, by reducing export income volatility and allowing for a smoother consumption path. Second, by reducing the country's need to hold foreign assets as precautionary savings (or by improving the country's ability to borrow against future export income). Under plausibly calibrated parameters, the second channel may lead to much larger welfare gains, amounting to several percentage points of annual consumption.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/229.

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Length: 29
Date of creation: 01 Oct 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/229
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  1. Hong Liang & C. John McDermott & Paul Cashin, 1999. "How Persistent Are Shocks to World Commodity Prices?," IMF Working Papers 99/80, International Monetary Fund.
  2. Pagano, Patrizio & Pisani, Massimiliano, 2009. "Risk-adjusted forecasts of oil prices," Working Paper Series 0999, European Central Bank.
  3. Arrau, Patricio & Claessens, Stijn, 1992. "Commodity stabilization funds," Policy Research Working Paper Series 835, The World Bank.
  4. Paolo Mauro & Törbjörn I. Becker & Jonathan David Ostry & Romain Ranciere & Olivier Jeanne, 2007. "Country Insurance: The Role of Domestic Policies," IMF Occasional Papers 254, International Monetary Fund.
  5. Enrique G. Mendoza & Ceyhun Bora Durdu & Marco Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism," IMF Working Papers 07/146, International Monetary Fund.
  6. Rodrigo O. Valdés & Eduardo Engel, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," IMF Working Papers 00/118, International Monetary Fund.
  7. Ricardo J. Caballero & Stavros Panageas, 2003. "Hedging Sudden Stops and Precautionary Contractions," NBER Working Papers 9778, National Bureau of Economic Research, Inc.
  8. Stephane Pallage & Michel A. Robe, 2003. "On the Welfare Cost of Economic Fluctuations in Developing Countries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 677-698, 05.
  9. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
  10. Christopher D. Carroll, 2005. "The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems," NBER Technical Working Papers 0309, National Bureau of Economic Research, Inc.
  11. Powell, Andrew, 1989. "The Management of Risk in Developing Country Finance," Oxford Review of Economic Policy, Oxford University Press, vol. 5(4), pages 69-87, Winter.
  12. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  13. Jonathan David Ostry & Atish R. Ghosh, 1992. "Macroeconomic Uncertainty, Precautionary Savings and the Current Account," IMF Working Papers 92/72, International Monetary Fund.
  14. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
  15. Rudolfs Bems & Irineu E. Carvalho Filho, 2009. "Current Account and Precautionary Savings for Exporters of Exhaustible Resources," IMF Working Papers 09/33, International Monetary Fund.
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