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Commodity price risk management and fiscal policy in a sovereign default model

Author

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  • Bernabe Lopez-Martin
  • Julio Leal
  • Andre Martinez Fritscher
Abstract
Commodity prices are an important driver of fiscal policy and the business cycle in many developing and emerging market economies. We analyze a dynamic stochastic small-open-economy model of sovereign default, featuring endogenous fiscal policy and stochastic commodity revenues. The model accounts for a positive correlation of commodity revenues with government expenditures and a negative correlation with tax rates. We quantitatively document the extent to which the utilization of different financial hedging instruments by the government contributes to lowering the volatility of different macroeconomic variables and their correlation with commodity revenues. An event analysis illustrates how financial hedging instruments moderate fiscal adjustment in response to significant falls in the price of commodities. We evaluate the conditional and unconditional welfare gains for the representative household, generated by financial derivatives and commodity-indexed bonds.

Suggested Citation

  • Bernabe Lopez-Martin & Julio Leal & Andre Martinez Fritscher, 2017. "Commodity price risk management and fiscal policy in a sovereign default model," BIS Working Papers 620, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:620
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    1. Commodity price risk management and fiscal policy in a sovereign default model
      by Christian Zimmermann in NEP-DGE blog on 2017-05-03 01:33:22

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    Cited by:

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    2. Monoj Kumar Majumder & Mala Valliammai Raghavan & Joaquin L. Vespignani, 2021. "Impact of commodity price volatility on external debt: the role of exchange rate regimes," Applied Economics, Taylor & Francis Journals, vol. 53(57), pages 6626-6640, December.
    3. Pierre JACQUET & Alexis ATLANI & Marwan LISSER, 2017. "Policy responses to terms of trade shocks," Working Papers P205, FERDI.
    4. Thomas McGregor, 2019. "Pricing Sovereign Debt in Resource-Rich Economies," IMF Working Papers 2019/240, International Monetary Fund.
    5. Kassouri, Yacouba & Altıntaş, Halil, 2021. "Cyclical drivers of fiscal policy in sub-Saharan Africa: New insights from the time-varying heterogeneity approach," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 51-67.
    6. van der Ploeg, Frederick, 2019. "Macro policy responses to natural resource windfalls and the crash in commodity prices," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 263-282.
    7. Chen, Peng & Miao, Xinru, 2024. "Understanding the role of China's factors in international commodity price fluctuations: A perspective of monetary-fiscal policy interaction," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 1464-1483.
    8. Alamgir, Farzana & Cotoc, Johnny & Johri, Alok, 2023. "The bribe rate and long run differences in sovereign borrowing costs," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    9. Rick Van der Ploeg, 2016. "Macro Policy Responses To Natural Resource Windfalls," OxCarre Working Papers 178, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    10. Troug, Haytem, 2020. "The heterogeneity among commodity-rich economies: Beyond the prices of commodities," Journal of Macroeconomics, Elsevier, vol. 66(C).
    11. Horvath, Jaroslav, 2018. "Business cycles, informal economy, and interest rates in emerging countries," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 96-116.
    12. Juan Carlos Hatchondo & Leonardo Martinez & Yasin Kürsat Önder & Francisco Roch, 2022. "Sovereign Cocos," Working Papers 139, Red Nacional de Investigadores en Economía (RedNIE).
      • Juan Carlos Hatchondo & Mr. Leonardo Martinez & Kursat Onder & Mr. Francisco Roch, 2022. "Sovereign Cocos," IMF Working Papers 2022/078, International Monetary Fund.
    13. Pierre JACQUET & Alexis ATLANI & Marwan LISSER, 2017. "Policy responses to terms of trade shocks," Working Papers P205, FERDI.
    14. Mirjalili, Seyed Hossein & Karimzadeh, Salim, 2021. "Inflow and Outflow of Oil Revenues: Scenarios for National Development Fund of Iran(NDFI)," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 25(4), pages 655-676.

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    More about this item

    Keywords

    commodity revenues; hedging; indexed bonds; fiscal policy; sovereign default;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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