Managing Terms of Trade Volatility

Terms of trade shocks may slow growth, worsen the distribution of income, and raise the odds of highly disruptive currency crises. This note raises questions on how can countries cope with terms of trade shocks; if commodity price stabilization funds can help; and, how can the private sector hedge. Countries need banks, governments, and hedging instruments to strategically cope with volatile external environments in the management of commodity price shocks. Banks should impose capital and liquidity requirements, and encourage internationalization of the domestic banking system, and, governments should promote transparency, delegating fiscal decision-making, by restricting the executive from spending, to avoid inconsistent deficits with inter-termporal solvency. Another strategy is to promote self-insurance, by creating commodity price stabilization funds that forbid the government from spending more than a specified portion of the income that it earns from a key commodity. But there is good reason to implement policies that promote hedging by the private sector, provided the public sector responds with the legal, and institutional framework, enabling appropriate risk management, i.e., both hedging, and self-insurance, even if strategies require that political economy, and technical obstacles be overcome.

Bibliographic Details

Main Author:	Hausmann, Ricardo
Format:	Brief biblioteca
Language:	English
Published:	World Bank, Washington, DC 1999-02
Subjects:	TRADE DEFICITS, ECONOMIC SHOCKS, ECONOMIC MANAGEMENT, INCOME DISTRIBUTION, CURRENCY STABILIZATION FUNDS, TERMS OF TRADE, COMMODITY PRICING POLICY, PRIVATE SECTOR MANAGEMENT, HEDGING, BANKING SYSTEMS, CAPITAL REQUIREMENTS, LIQUIDITY CONTROLS, DOMESTIC MARKETS, FISCAL EFFICIENCY, PUBLIC SPENDING, DEFICITS, SOLVENCY, SELF-INSURANCE, COMMODITY STABILIZATION FUNDS, LEGAL & REGULATORY FRAMEWORK, INSTITUTIONAL FRAMEWORK, RISK MANAGEMENT CONSTITUENCIES, CURRENCY, CURRENCY CRISES, DEBT, DEVELOPMENT ECONOMICS, DOMESTIC BANKING SYSTEM, ECONOMIC ENVIRONMENT, ECONOMIC IMPACT, ECONOMIC POLICY, EXCHANGE RATE, EXCHANGE RATE REGIMES, EXTERNAL ENVIRONMENT, EXTERNAL SHOCKS, FINANCIAL CRISIS, FINANCIAL SYSTEM, FISCAL, FISCAL DEFICIT, FISCAL POLICY, FUNGIBILITY, GOVERNMENT OFFICIALS, HUMAN CAPITAL, INCOME, INSTITUTIONAL ARRANGEMENTS, INSTITUTIONAL REFORM, INSTITUTIONAL REFORMS, INSURANCE, INTERNATIONALIZATION, LIQUIDITY, MACROECONOMIC SHOCKS, MACROECONOMIC STABILITY, MACROECONOMIC VOLATILITY, OIL, POLITICAL ECONOMY, POVERTY REDUCTION, PRESIDENCY, PRIVATE SECTOR, PUBLIC SECTOR, REAL EXCHANGE, REAL EXCHANGE RATE, RISK MANAGEMENT, SLOW GROWTH, STABILIZATION, TERMS OF TRADE SHOCKS, TRANSPARENCY, VULNERABILITY,
Online Access:	http://documents.worldbank.org/curated/en/1999/02/717482/managing-terms-trade-volatility http://hdl.handle.net/10986/11495
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