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.
Details
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Author
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Document Date
1999/02/01
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Document Type
Brief
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Report Number
21253
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2010/07/01
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Disclosure Status
Disclosed
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Doc Name
Gestion de la inestabilidad de la relacion de intercambio
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Keywords
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
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Citation
Hausmann,Ricardo
Managing terms of trade volatility : Gestion de la inestabilidad de la relacion de intercambio (Spanish). PREM Notes,no. 18. Economic Policy Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/472981468170954093/Gestion-de-la-inestabilidad-de-la-relacion-de-intercambio