Discussion Paper Details

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Title: In Favour of a Fund to Stabilize Commodity Exporters' Income

Author(s): Daniel Cohen, Thibault Fally and Sébastien Villemot

Publication Date: March 2006

Keyword(s): commodities, low income countries and stabilization

Programme Area(s): International Macroeconomics

Abstract: Commodity prices are usually very slow to recover from adverse shocks. This is one of the reasons why it has proven so difficult either to smooth their effect or to stabilize them, and why it is sometimes argued that they should behave as if shocks were permanent. There is no reason however why countries should not find ways to protect themselves. This paper develops one practical idea on how this could be done. Our goal is not to stabilize prices, but to smooth the income of the producers. Countries, we assume, should get protection against deviation of commodity prices from a moving average of past prices. This avoids the pitfalls of past stabilization that attempted to stabilize around a single price and yet our scheme gives countries time to adjust to permanent shocks. Over a period of a 50 years time horizon, we simulate that the median cost would be worth about six months of exports.

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Bibliographic Reference

Cohen, D, Fally, T and Villemot, S. 2006. 'In Favour of a Fund to Stabilize Commodity Exporters' Income'. London, Centre for Economic Policy Research.