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Macro-Hedging for Commodity Exporters

  • Olivier Jeanne

    (Johns Hopkins University)

  • Damiano Sandri

    (International Monetary Fund)

  • Eduardo Borensztein

    (Inter-American Development Bank)

This paper uses a dynamic optimization model to estimate the welfare gains of hedging against commodity price risk for commodity-exporting countries. We show that 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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File URL: https://www.economicdynamics.org/meetpapers/2010/paper_832.pdf
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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 832.

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Date of creation: 2010
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Handle: RePEc:red:sed010:832
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  1. Durdu, Ceyhun Bora & Mendoza, Enrique G. & Terrones, Marco E., 2009. "Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism," Journal of Development Economics, Elsevier, vol. 89(2), pages 194-209, July.
  2. Arrau, Patricio & Claessens, Stijn, 1992. "Commodity stabilization funds," Policy Research Working Paper Series 835, The World Bank.
  3. 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.
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  6. Christopher Carroll, 2005. "The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems," Economics Working Paper Archive 520, The Johns Hopkins University,Department of Economics.
  7. Ricardo J. Caballero & Stavros Panageas, 2003. "Hedging Sudden Stops and Precautionary Contractions," NBER Working Papers 9778, National Bureau of Economic Research, Inc.
  8. 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.
  9. Patrizio Pagano & Massimiliano Pisani, 2006. "Risk-Adjusted Forecasts of Oil Prices," Temi di discussione (Economic working papers) 585, Bank of Italy, Economic Research and International Relations Area.
  10. Paul Cashin & Hong Liang & C. John McDermott, 2000. "How Persistent Are Shocks to World Commodity Prices?," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 2.
  11. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
  12. 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.
  13. Rodrigo O. Valdés & Eduardo Engel, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," IMF Working Papers 00/118, International Monetary Fund.
  14. 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.
  15. Ghosh, Atish R. & Ostry, Jonathan D., 1997. "Macroeconomic uncertainty, precautionary saving, and the current account," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 121-139, September.
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