Working Paper: CEPR ID: DP5550
Authors: Daniel Cohen; Thibault Fally; Sebastien Villemot
Abstract: Commodity prices are usually very slow to recover from adverse shocks. This is one of the reasons why it has proven so difficult either to smooth their effect or to stabilize them, and why it is sometimes argued that they should behave as if shocks were permanent. There is no reason however why countries should not find ways to protect themselves. This paper develops one practical idea on how this could be done. Our goal is not to stabilize prices, but to smooth the income of the producers. Countries, we assume, should get protection against deviation of commodity prices from a moving average of past prices. This avoids the pitfalls of past stabilization that attempted to stabilize around a single price and yet our scheme gives countries time to adjust to permanent shocks. Over a period of a 50 years time horizon, we simulate that the median cost would be worth about six months of exports.
Keywords: commodities; low income countries; stabilization
JEL Codes: F34; O13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| commodity price volatility (Q02) | economic stability of low-income countries (O54) |
| establishing a fund (G23) | smoothing income for commodity producers (Q02) |
| commodity price shocks (Q02) | significant income loss in low-income countries (F63) |
| stabilization fund (E63) | mitigate adverse effects of commodity price shocks (Q02) |
| fund (G23) | stabilize producer income (Q13) |
| debt instruments considering commodity price fluctuations (G13) | stabilize income (E63) |