Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/174457
Authors: 
Lopez-Martin, Bernabe
Leal, Julio
Fritscher, André Martínez
Year of Publication: 
2017
Series/Report no.: 
Working Papers 2017-04
Abstract: 
Commodity prices are an important driver of fiscal policy and the business cycle in many developing economies. We analyze a dynamic stochastic small-open-economy model of sovereign default, featuring endogenous fiscal policy and stochastic commodity revenues. The model accounts for a positive correlation of commodity revenues with government expenditures and a negative correlation with tax rates. We quantitatively document the extent to which the utilization of different financial hedging instruments by the government contributes to lowering the volatility of different macroeconomic variables and their correlation with commodity revenues. An event analysis illustrates how financial hedging instruments moderate fiscal adjustment in response to significant falls in the price of commodities.
Subjects: 
commodity revenues
hedging
indexed bonds
fiscal policy
sovereign default
JEL: 
F34
F41
F44
Document Type: 
Working Paper
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