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Commodity Price Risk Management and Fiscal Policy in a Sovereign Default Model

Bernabe Lopez-Martin (), Leal-Ordoñez Julio C. and Martínez André
Authors registered in the RePEc Author Service: Julio César Leal Ordóñez

No 2017-04, Working Papers from Banco de México

Abstract: Commodity prices are an important driver of fiscal policy and the business cycle in many developing 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.

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)
New Economics Papers: this item is included in nep-dge and nep-opm
Date: 2017-04
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