Abstract:

Countries that specialize in commodities have in recent years been hit by high volatility in world prices for their exports. This paper suggests three 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.

Notes:

Keynote address, Bank of Algeria, Algiers, May 28-29, 2016.

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