Working Paper: NBER ID: w15452
Authors: Eduardo Borensztein; Olivier Jeanne; Damiano Sandri
Abstract: This paper uses a dynamic optimization model to estimate the welfare gains of hedging against commodity price risk for commodity-exporting countries. We show that the introduction of hedging instruments such as futures and options enhances domestic welfare through two channels. First, by reducing export income volatility and allowing for a smoother consumption path. Second, by reducing the country's need to hold foreign assets as precautionary savings (or by improving the country's ability to borrow against future export income). Under plausibly calibrated parameters, the second channel may lead to much larger welfare gains, amounting to several percentage points of annual consumption.
Keywords: Macrohedging; Commodity Exporters; Welfare Gains; Hedging Instruments; Commodity Price Risk
JEL Codes: C61; E21; F30; F40; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of hedging instruments (G13) | domestic welfare (I38) |
| reduction of export income volatility (F14) | smoother consumption path (D15) |
| smoother consumption path (D15) | domestic welfare (I38) |
| hedging reduces necessity for precautionary savings (D14) | improves external balance sheet (G32) |
| improved external balance sheet (F32) | domestic welfare (I38) |
| hedging allows for more default-free external debt issuance (F34) | domestic welfare (I38) |