EconPapers    
Economics at your fingertips  
 

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

Bernabe Lopez-Martin (), Julio Leal and Andre Martinez Fritscher

Journal of International Money and Finance, 2019, vol. 96, issue C, 304-323

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.

Keywords: Commodity revenues; Hedging; Indexed bonds; Fiscal policy; Sovereign default (search for similar items in EconPapers)
JEL-codes: F34 F41 F44 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560617301274
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Commodity Price Risk Management and Fiscal Policy in a Sovereign Default Model (2017) Downloads
Working Paper: Commodity price risk management and fiscal policy in a sovereign default model (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:96:y:2019:i:c:p:304-323

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-11-24
Handle: RePEc:eee:jimfin:v:96:y:2019:i:c:p:304-323