Macro-Hedging for Commodity Exporters

Abstract

We would like to thank seminar participants at a NBER workshop, the Bank of Canada and the International Monetary Fund for useful comments. The views expressed in the paper are those of the authors and do not necessarily represent those of the Inter-American Development Bank, the International Monetary Fund, or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The current account and precautionary savings for exporters of exhaustible resources

“…However, on the balanced growth path, the return on domestic capital has to equal the world interest rate, limiting the long-run impact of this diversification channel. 6 This process is borrowed from Borensztein et al (2009). We do not use an AR(1) in logs, because it complicates the interpretation of precautionary savings (due to E(e pt ) N e E(pt) ).…”

“…Contrary to the prescriptions of economic theory, domestic ownership of exhaustible resources in major oil producing countries has been on the rise in recent decades and markets for hedging resource price fluctuations remain very small. As of April 2009, the total open interest in exchanges and overthe-counter markets for hedging resource price fluctuations was estimated at only 4 weeks of world oil consumption and 0.18% of proven oil reserves (see Borensztein et al, 2009). Daniel (2001) 1 This modeling framework has been advocated in Davis et al (2003) argues that political constraints have held back governments from using explicit insurance.…”

“…Carroll (2001), where precautionary savings are usually defined as change in the distribution of savings in a stationary steady state. 9 For details on the estimation procedure see Borensztein et al (2009). To project beyond 2030, we assume that resource extraction proceeds at a constant level until reserves are exhausted.…”

Sugar with your Coffee? Fundamentals, Financials, and Softs Price Uncertainty

“…Insofar as the welfare costs of business cycles in those countries are much higher than in advanced economies (Pallage & Robe, ), commodity prices fluctuations are thus very costly to producer countries. Costs extend further as export income volatility also forces governments “to hold precautionary reserves” and curtails their “ability to borrow against future export income” (Borensztein, Jeanne, & Sandri, , p. 105).…”

The volatility trap: Precautionary saving, investment, and aggregate risk

“…See Borensztein, Jeanne, and Sandri () and Zhang, Chamon, and Ricci () for studies exploring the effects of hedging aggregate risk.…”