Can Financial Hedging Serve Macroprudential Objectives?

Leandro Gaston Andrian, John Leon-Diaz and Eugenio Rojas

No 14083, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: We examine hedging as a macroprudential tool in a Sudden Stops model of an economy exposed to commodity price fluctuations. We find that hedging commodity revenues yields significant welfare gains by stabilizing public expenditure, which heavily depends on these revenues. However, this added stability weakens precautionary motives and exacerbates the pecuniary externality that drives overborrowing in such models. As a result, hedging and traditional macroprudential policy act as complements rather than substitutes, with more ag- gressive hedging inducing a stronger macroprudential response. Our findings suggest that while hedging enhances stability and improves welfare, it does not eliminate the need for macroprudential regulation.

Keywords: Hedging; Sudden stops; Financial Crises; Macroprudential policy (search for similar items in EconPapers)
JEL-codes: F32 F41 G13 (search for similar items in EconPapers)
Date: 2025-04
New Economics Papers: this item is included in nep-dge, nep-fmk and nep-inv
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:14083

DOI: 10.18235/0013511

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