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 fun...
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| Format: | Brief |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/1999/02/717482/managing-terms-trade-volatility http://hdl.handle.net/10986/11495 |
| Summary: | 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. |
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