James W. Harpel Professor of Capital Formation and Growth
Countries that specialize in commodities have in recent years been hit by high volatility in world prices for their exports. This paper suggests three ways that commodity-exporters can make themselves less vulnerable. (1) They can use option contracts to hedge against short-term declines in the commodity price without giving up the upside, as Mexico has shown. (2) Commodity-linked bonds can hedge longer-term risk, and often have a natural ultimate counter-party in multinational corporations that depend on the commodity as an input. (3) The well-documented pro-cyclicality of fiscal policy among commodity exporters can be reduced by insulating official forecasters against optimism bias, as Chile has shown.
Frankel, Jeffrey A. "How to Cope with Volatile Commodity Export Prices: Three Proposals." Rethinking the Macroeconomics of Resource-Rich Countries. Ed. Rabah Arezki, Raouf Boucekkine, Jeffrey A. Frankel, and Rick van der Ploeg. Center for Economic Policy Research, 2018.