Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324784 
Year of Publication: 
2025
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-01695
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
We examine hedging as a macroprudential tool in a Sudden Stops model of an economy exposed to commodity price fluctuations. We find that hedging commodity revenues yields significant welfare gains by stabilizing public expenditure, which heavily depends on these revenues. However, this added stability weakens precautionary motives and exacerbates the pecuniary externality that drives overborrowing in such models. As a result, hedging and traditional macroprudential policy act as complements rather than substitutes, with more ag- gressive hedging inducing a stronger macroprudential response. Our findings suggest that while hedging enhances stability and improves welfare, it does not eliminate the need for macroprudential regulation.
Subjects: 
Hedging
Sudden Stops
Financial Crises
Macroprudential Policy
JEL: 
F32
F41
G13
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Working Paper

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