1. Coping with Commodity Volatility: Macroeconomic Policies for Developing Countries June 19, 2015 Jeffrey Frankel Harpel Professor of Capital Formation & Growth

2. 2 Prequel: In 2008, the government of Chilean President Bachelet & her Finance Minister Velasco ranked low in public opinion polls. By late 2009, they were the most popular in 20 years. Why? Presidents Patricio Aylwin, Eduardo Frei, Ricardo Lagos and Michelle Bachelet Data: CEP, Encuesta Nacional de Opinion Publica, October 2009, www.cepchile.cl. Source: Engel et al (2011). Evolution of approval & disapproval of four Chilean presidents

3. 3 IMF WORLD ECONOMIC OUTLOOK (WEO) Uneven Growth: Short- and Long-Term Factors April 2015 Oil Oil = average petroleum spot price Commodity prices had big swings over 2005-15.

4. Minerals, hydrocarbons, & agricultural products have highly variable prices Leading Commodity Export* Standard Deviation of Log of Dollar Price 1970-2008 ARGSoybeans0.28 BOLNatural Gas1.82 BRASteel0.59 CHLCopper0.41 COLOil0.76 CRIBananas0.44 ECUOil0.76 GTMCoffee0.48 GUYSugar0.47 HNDCoffee0.48 JAMAluminum0.42 MEXOil0.76 NICCoffee0.48 PANBananas0.44 PERCopper0.41 PRYBeef0.23 SLVCoffee0.48 TTONatural Gas1.82 URYBeef0.23 VENOil0.76 Major Commodity Exports in Latin American countries and Standard Deviation of Prices on World Markets Frankel (2011) * World Bank analysis (2007 data)

5. GS Macro Econ- omics Research, Goldman Sachs, Nov. 12, 2014 Price volatility of commodities matters even for developing countries that don’t export them: Food & energy have much larger weights in EM consumption baskets than in Advanced Countries’.

6. 6 How can developing countries cope with volatility in their terms of trade? Choices of macroeconomic policies & institutions can help manage the volatility. Too often, historically, they have exacerbated it: Pro-cyclical macroeconomics (i) capital flows; (ii) money & credit; and (iii) fiscal policy.

7. 7 (i) Pro-cyclical capital flows According to intertemporal optimization theory, capital flows should be countercyclical: flowing in when exports do badly and flowing out when exports do well. In practice, it does not always work this way. Capital flows are more procyclical than countercyclical. Gavin, Hausmann, Perotti & Talvi (1996) ; Kaminsky, Reinhart & Vegh (2005) ; Reinhart & Reinhart (2009); and Mendoza & Terrones (2008). Theories to explain this involve capital market imperfections, e.g., asymmetric information or the need for collateral.

8. 8 (ii) Pro-cyclical monetary policy If the exchange rate is fixed, surpluses during commodity booms can lead to: Rising reserves, Excessive money & credit, Excess demand for goods; overheating, Inflation, Asset bubbles.

9. 9 Macro effects of commodity boom Inflation shows up especially in non-traded goods & services, such as construction. Inflation shows up especially in non-traded goods & services, such as construction.

10. 10 Pro-cyclical real exchange rate Countries undergoing a commodity boom experience real appreciation of their currency The resulting shift of land, labor & capital out of manufacturing, and into the booming commodity sector might be appropriate & inevitable, The resulting shift of land, labor & capital out of manufacturing, and into the booming commodity sector might be appropriate & inevitable, to the extent it is expandable, to the extent it is expandable, especially if the commodity boom is permanent. especially if the commodity boom is permanent. But the shift out of manufacturing into NTGs can be an undesirable macroeconomic side effect – But the shift out of manufacturing into NTGs can be an undesirable macroeconomic side effect – the “disease” part of Dutch Disease. the “disease” part of Dutch Disease.

11. 11 (iii) Procyclical fiscal policy Fiscal policy has historically tended to be procyclical in developing countries Fiscal policy has historically tended to be procyclical in developing countries especially among commodity exporters: especially among commodity exporters: Cuddington (1989), Gavin & Perotti (1997), Tornell & Lane (1999), Kaminsky, Reinhart & Végh (2004), Talvi & Végh (2005), Mendoza & Oviedo (2006), Alesina, Campante & Tabellini (2008), Ilzetski & Végh (2008), Medas & Zakharova (2009), Medina (2010), Arezki, Hamilton & Kazimov (2011), Erbil (2011) and Céspedes & Velasco (2014). Cuddington (1989), Gavin & Perotti (1997), Tornell & Lane (1999), Kaminsky, Reinhart & Végh (2004), Talvi & Végh (2005), Mendoza & Oviedo (2006), Alesina, Campante & Tabellini (2008), Ilzetski & Végh (2008), Medas & Zakharova (2009), Medina (2010), Arezki, Hamilton & Kazimov (2011), Erbil (2011) and Céspedes & Velasco (2014). Correlation of income & spending mostly positive – Correlation of income & spending mostly positive – in comparison with industrialized countries. in comparison with industrialized countries.

12. 12 Correlations between Gov.t Spending & GDP 1960-1999 procyclical } G always used to be pro-cyclical for most developing countries. countercyclical Adapted from Kaminsky, Reinhart & Vegh (2004 )

13. 1313 The procyclicality of fiscal policy, continued A reason for procyclical public spending: receipts from taxes & royalties rise in booms. The government cannot resist the temptation to increase spending proportionately, or more. A reason for procyclical public spending: receipts from taxes & royalties rise in booms. The government cannot resist the temptation to increase spending proportionately, or more. Then it is forced to contract in recessions, Then it is forced to contract in recessions, thereby exacerbating the swings. thereby exacerbating the swings.

14. 1414 Two budget items account for much of the spending from oil booms: (i) Investment projects. (i) Investment projects. Investment in practice may be “white elephant” projects, Investment in practice may be “white elephant” projects, which are stranded without funds for completion or maintenance when the oil price goes back down. which are stranded without funds for completion or maintenance when the oil price goes back down. Gelb (1986). Gelb (1986). (ii) The government wage bill. (ii) The government wage bill. Oil windfalls are often spent on public sector wages. Oil windfalls are often spent on public sector wages. Medas & Zakharova (2009) Medas & Zakharova (2009) Spending rises in booms, but is downward-sticky. Arezki & Ismail (2013). Arezki & Ismail (2013). Rumbi Sithole took this photo in “Bayelsa State in the Niger Delta,in Nigeria. The state government received a windfall of money and didn't have the capacity to have it all absorbed in social services so they decided to build a Hilton Hotel. The construction company did a shoddy job, so the tower is leaning to its right and it’s unsalvageable..”

15. 1515 An important development -- some developing countries, including commodity producers, were able to break the historic pattern in the most recent decade: An important development -- some developing countries, including commodity producers, were able to break the historic pattern in the most recent decade: taking advantage of the boom of 2002-2008 taking advantage of the boom of 2002-2008 to run budget surpluses & build reserves, to run budget surpluses & build reserves, thereby earning the ability to expand fiscally in the 2008-09 crisis. thereby earning the ability to expand fiscally in the 2008-09 crisis. Chile, Botswana, Malaysia, Indonesia, Korea… Chile, Botswana, Malaysia, Indonesia, Korea… How were they able to achieve counter-cyclicality? How were they able to achieve counter-cyclicality? The procyclicality of fiscal policy, cont.

16. Adapted from Frankel, Vegh & Vuletin (JDE, 2013) Last decade, about 1/3 developing countries switched to countercyclical fiscal policy: Negative correlation of G & GDP. procyclical countercyclical Correlations between government spending & GDP 2000-09

17. Price controls Price controls Export controls Export controls Stockpiles Marketing boards Producer subsidies Blaming derivatives Nationalization Banning foreign participation How can countries cope with high volatility in their terms of trade? Not by policies that try to suppress price volatility:

18. 18 1. How can a country avoid excessive credit creation & inflation in a commodity boom ? 1. How can a country avoid excessive credit creation & inflation in a commodity boom ? & balance of payments crisis in a bust? & balance of payments crisis in a bust? Allow some currency appreciation/depreciation. Allow some currency appreciation/depreciation. 2. Nominal anchor for monetary policy: 2. Nominal anchor for monetary policy: What is it to be, if not the exchange rate? CPI? What is it to be, if not the exchange rate? CPI? 3. Fiscal policy: How can governments be constrained from over-spending in boom times? Fiscal rule? 3. Fiscal policy: How can governments be constrained from over-spending in boom times? Fiscal rule? 4. What microeconomic arrangements can reduce macroeconomic volatility? 4. What microeconomic arrangements can reduce macroeconomic volatility? Four policy questions

19. How can countries cope with high volatility? Four ideas that may help manage volatility Micro Macro Tried & tested: 1) Hedging 3) Fiscal policy Untried: 2) Debt denomination 4) Monetary policy

20. 1) For financial hedging against fluctuations in $ price of the export commodity -- 1) For financial hedging against fluctuations in $ price of the export commodity -- Use options to hedge against downside fluctuations of the commodity price. Use options to hedge against downside fluctuations of the commodity price. Mexico does it annually for oil. Mexico does it annually for oil. thereby mitigating the 2009 & 2015 downturns, for example. thereby mitigating the 2009 & 2015 downturns, for example. Why not use the futures or forward market? Why not use the futures or forward market? Ghana tried it, for cocoa. Ghana tried it, for cocoa. But: The minister who sells forward may get But: The minister who sells forward may get meager credit if the commodity price goes down, meager credit if the commodity price goes down, and lots of blame if the price goes up. and lots of blame if the price goes up. Also the maturity may not go out far enough. Also the maturity may not go out far enough.

21. 21 “Managing Volatility in Low-Income Countries: The Role and Potential for Contingent Financial Instruments,” IMF SPRD & World Bank PREM, approved by Reza Moghadam & Otaviano Canuto, Oct. 2011. Fig.7 p.21. For some commodities, futures contracts are unavailable at long horizons

22. 2) Another idea for hedging against fluctuations in $ price of the export commodity 2) Another idea for hedging against fluctuations in $ price of the export commodity For those who borrow, For those who borrow, e.g., an African country developing oil discoveries: e.g., an African country developing oil discoveries: link the terms of the loan, not to $ or €, nor to the local currency, but to the price of the export commodity. link the terms of the loan, not to $ or €, nor to the local currency, but to the price of the export commodity. Then debt service obligations match revenues. Then debt service obligations match revenues. Debt crises Debt crises in 1998: Indonesia, Russia & Ecuador in 1998: Indonesia, Russia & Ecuador in 2014-15: Nigeria, Ghana & Venezuela: in 2014-15: Nigeria, Ghana & Venezuela: <= the $ prices of their oil exports fell, <= the $ prices of their oil exports fell, and so their debt service ratios worsened. and so their debt service ratios worsened. Indexation of debts to oil prices might have prevented the crises. Indexation of debts to oil prices might have prevented the crises. An old idea. Why has it hardly ever been tried? An old idea. Why has it hardly ever been tried?

23. “Who would buy bonds linked to commodity prices?” Answer -- There are natural customers: Answer -- There are natural customers: Power utilities, refiners, & airlines, for oil; Power utilities, refiners, & airlines, for oil; Steelmakers, for iron ore; Steelmakers, for iron ore; Millers & bakers, for wheat; Millers & bakers, for wheat; Etc. Etc. Presumably the firms don’t want the credit risk. Presumably the firms don’t want the credit risk. => The World Bank should intermediate: => The World Bank should intermediate: Link client-country loans to the oil price; Link client-country loans to the oil price; then lay off the oil risk by selling precisely that amount of oil-linked World Bank bonds to the private sector. then lay off the oil risk by selling precisely that amount of oil-linked World Bank bonds to the private sector.

24. 24 3. How Can Countries Avoid Pro-cyclical Fiscal Policy? “Good institutions.”

25. 25 ”On Graduation from Fiscal Procyclicality,” Frankel, Végh & Vuletin; J.Dev.Econ., 2013. Who achieves counter-cyclical fiscal policy? Countries with “good institutions”

26. The quality of institutions varies, not just across countries, but also across time. 26 1984-2009 Frankel, Végh & Vuletin,2013.

27. 27 ”On Graduation from Fiscal Procyclicality,” Frankel, Végh & Vuletin; J. Devel. Econ., 2013. The comparison holds not only in cross-section, but also across time.

28. 28 How can countries avoid fiscal expansion in booms? What are “good institutions,” specifically? Rules? Budget deficits or debt brakes? Have been tried many times. Usually fail.

29. Countries with Balanced Budget Rules frequently violate them. International Monetary Fund, 2014 BBR: Balanced Budget Rules DR: Debt Rules ER: Expenditure Rules Compliance < 50%

30. To expect countries to comply with the rules during recessions is particularly unrealistic (and not even necessarily desirable). International Monetary Fund, 2014 Bad times: years when output gap < 0 Compliance worse in recession years

31. What specific institutions can help? Budget rules alone won’t do it. Budget rules alone won’t do it. Rigid Budget Deficit ceilings operate pro-cyclically. Rigid Budget Deficit ceilings operate pro-cyclically. Phrasing the target in cyclically adjusted terms helps solves that problem in theory; Phrasing the target in cyclically adjusted terms helps solves that problem in theory; But in practice, overly optimistic forecasts by official agencies render rules ineffective. But in practice, overly optimistic forecasts by official agencies render rules ineffective. Frankel & Schreger, 2013, "Over-optimistic Official Forecasts in the Eurozone and Fiscal Rules," Rev. World Ec. Frankel & Schreger, 2013, "Over-optimistic Official Forecasts in the Eurozone and Fiscal Rules," Rev. World Ec.

32. An institution that others might emulate: The Chile model “A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile,” 2013, in Fiscal Policy and Macroeconomic Performance, edited by Luis Felipe Céspedes & Jordi Galí. “A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile,” 2013, in Fiscal Policy and Macroeconomic Performance, edited by Luis Felipe Céspedes & Jordi Galí. I concluded that the key feature was the delegation to independent committees of the responsibility to estimate long-run trends in the copper price & GDP, I concluded that the key feature was the delegation to independent committees of the responsibility to estimate long-run trends in the copper price & GDP, thus avoiding the systematic over-optimism that plagues official forecasts in 32 other countries. thus avoiding the systematic over-optimism that plagues official forecasts in 32 other countries.

33. 33 Over-optimism in official forecasts Statistically significant bias among 33 countries Worse in booms. Worse at 3-year horizons than 1-year. Frankel (2011, 2013). Leads to pro-cyclical fiscal policy: If the boom is forecast to last indefinitely, there is no apparent need to retrench. BD rules don’t help. The SGP worsens forecast bias for euro countries. Cyclically adjusted rules won’t help the bias either. Frankel & Schreger (2013). Solution?

34. 34 1 st rule – Governments must set a budget target, 1 st rule – Governments must set a budget target, 2 nd rule – The target is structural: Deficits allowed only to the extent that 2 nd rule – The target is structural: Deficits allowed only to the extent that (1) output falls short of trend, in a recession, or (1) output falls short of trend, in a recession, or (2) the price of copper is below its trend. (2) the price of copper is below its trend. 3 rd rule – The trends are projected by 2 panels of independent experts, outside the political process. 3 rd rule – The trends are projected by 2 panels of independent experts, outside the political process. Result: Chile avoided the pattern of 32 other governments, Result: Chile avoided the pattern of 32 other governments, where forecasts in booms were biased toward optimism. where forecasts in booms were biased toward optimism. The example of Chile’s fiscal institutions

35. 35 Chilean fiscal institutions In 2000 Chile instituted its structural budget rule. The institution was formalized into law in 2006. The structural budget surplus must be… 0 as of 2008 (was higher before, lower after), where “structural” is defined by output & copper price equal to their long-run trend values. I.e., in a boom the government can only spend increased revenues that are deemed permanent; any temporary copper bonanzas must be saved.

36. 36 Chile’s fiscal position strengthened immediately: Public saving rose from 3 % of GDP in 2000 to 8 % in 2005 allowing national saving to rise from 21 % to 24 %. Government debt fell sharply as a share of GDP and the sovereign spread gradually declined. By 2006, Chile achieved a sovereign debt rating of A, several notches ahead of Latin American peers. By 2007 it had become a net creditor. By 2010, Chile’s sovereign rating had climbed to A+, ahead of some advanced countries. => It was able to respond to the 2008-09 recession. The Pay-off

37. 37 In 2008, with copper prices spiking up, the government of President Bachelet had been under intense pressure to spend the revenue. She & Fin.Min.Velasco held to the rule, saving most of it. Their popularity fell sharply. When the recession hit and the copper price came back down, the government increased spending, mitigating the downturn. Bachelet & Velasco’s popularity reached historic highs by the time they left office.

38. 38

39. More exposed to terms of trade shocks More exposed to terms of trade shocks especially volatile commodity prices. especially volatile commodity prices. And more exposed to supply shocks And more exposed to supply shocks a) such as natural disasters (hurricanes, cyclones, earthquakes, tsunamis…) b) other weather events (droughts…), c) social unrest (strikes…), d) productivity shocks (“Are we the next Tiger economy?”). Developing countries differ from industrialized economies: 4) The challenge of designing a monetary regime for countries where trade shocks dominate

40. Developing countries have more trade shocks & natural disasters 40 “Managing Volatility in Low-Income Countries: The Role and Potential for Contingent Financial Instruments,” IMF SPRD & World Bank PREM, approved by R.Moghadam & O.Canuto, Oct. 2011. Fig.1.

41. Demand vs. supply shocks An old wisdom regarding the source of shocks: An old wisdom regarding the source of shocks: Fixed rates work best if shocks are mostly internal demand shocks (especially monetary); Fixed rates work best if shocks are mostly internal demand shocks (especially monetary); floating rates work best if shocks tend to be real shocks (especially external terms of trade). floating rates work best if shocks tend to be real shocks (especially external terms of trade). One set of supply shocks: natural disasters One set of supply shocks: natural disasters R.Ramcharan (2007) finds floating works better. R.Ramcharan (2007) finds floating works better. Common source of real shocks: trade. Common source of real shocks: trade.

42. Terms-of-trade variability Prices of crude oil and other agricultural & mineral commodities hit record highs in 2008 & 2011. Prices of crude oil and other agricultural & mineral commodities hit record highs in 2008 & 2011. => Favorable terms of trade shocks for some (oil producers, Africa, Latin America…); => Favorable terms of trade shocks for some (oil producers, Africa, Latin America…); => Unfavorable terms of trade shock for others (oil importers such as Korea, India…). => Unfavorable terms of trade shock for others (oil importers such as Korea, India…).

43. Prices of oil & gas are the most volatile of all. A New Ceiling for Oil Prices, Anatole Kaletsky, 1/14/2015 http://www.project-syndicate.org/commentary/oil-prices-ceiling-and-floor-by-anatole-kaletsky-2015-01 1970-2015

44. 44 The challenge of designing a monetary regime for countries where terms of trade shocks dominate the cycle, continued Fixing the exchange rate leads to pro-cyclical monetary policy: Money flows in during commodity booms. Excessive credit creation can lead to inflation. Example: Saudi Arabia & UAE during the 2003-08 oil boom. Money flows out during commodity busts. Credit squeeze can lead to excess supply, recession & balance of payments crisis. Example: Exporters of oil & other commodities in mid-1980s, 1997-98, or 2014-15.

45. 45 Monetary regime, continued Floating accommodates terms of trade shocks: If terms of trade improve, currency automatically appreciates, preventing excessive money inflows, overheating & inflation. If terms of trade worsen, currency automatically depreciates, preventing recession & balance of payments crisis. Disadvantages of floating: Volatility can be excessive. One needs a nominal anchor.

46. Textbook theory says a country where trade shocks dominate should accommodate by floating. Textbook theory says a country where trade shocks dominate should accommodate by floating. Confirmed empirically: Confirmed empirically: Developing countries facing terms of trade shocks do better with flexible exchange rates than fixed exchange rates. Developing countries facing terms of trade shocks do better with flexible exchange rates than fixed exchange rates. Broda (2004 ), Broda (2004 ), Edwards & L.Yeyati (2005), Edwards & L.Yeyati (2005), Rafiq (2011), and Rafiq (2011), and Céspedes & Velasco (2012). Céspedes & Velasco (2012).

47. 47 Constant term not reported. (t-statistics in parentheses.) ** Statistically significant at 5% level. Across 107 major commodity boom-bust cycles, output loss is bigger the bigger is the commodity price change & the smaller is exchange rate flexibility. Céspedes & Velasco (2012), IMF Economic Review “Macroeconomic Performance During Commodity Price Booms & Busts”

48. 48 Monetary regime If the exchange rate is not to be the monetary anchor, what is? Popular choice: Inflation Targeting. But CPI targeting can react perversely to supply shocks & terms of trade shocks.

49. 49 Each of the traditional candidates for nominal anchor has an Achilles heel. The CPI anchor does not accommodate terms of trade changes: IT tightens M & appreciates when import prices rise not when export prices rise. That is backwards. Targeting core CPI does not much help. Commodity exporters need an alternative anchor that is robust to trade shocks.

50. Professor Jeffrey Frankel 6 proposed nominal targets and the Achilles heel of each: Vulnerability

51. 51 Needed: Nominal anchors that accommodate the shocks that are common in developing countries Supply shocks, e.g., droughts, floods, hurricanes: Nominal GDP Targeting. Terms of trade shocks e.g., fall in price of commodity export. NGDPT or PEP PEP

52. 52 P eg the E xport P rice accommodates terms of trade shocks [1] Proposal for an oil-exporting country that attempts to peg to a currency basket: add a barrel of oil into the basket. E.g., Azerbaijan, Kazakhstan or Kuwait. With oil in the basket, money tightens & the currency appreciates when the world price of oil rises and the currency depreciates when oil falls. [1] Frankel (2003). PEP

53. 53 Why is PEP better than a fixed exchange rate for countries with volatile export prices? If the $ price of the export commodity rises, the currency automatically appreciates, moderating the boom. If the $ price of export commodity falls, the currency automatically depreciates, moderating the downturn & improving the balance of payments. PEP

54. 54 Why is PEP better than CPI-targeting for countries with volatile terms of trade? If the $ price of imported commodity goes up, CPI target says to tighten monetary policy enough to appreciate the currency. Wrong response. (E.g., oil-importers in 2007-08.) PPT does not have this flaw. If the $ price of the export commodity goes up, PPT says to tighten money enough to appreciate. Right response. (E.g., Gulf currencies in 2007-08.) CPI targeting does not have this advantage. PEP

55. Figure 2: When a Nominal GDP Target delivers a better outcome than IT Supply shock is split between output & inflation objectives rather than falling exclusively on output as under IT (at B).

56. Figure 3: Can IT Deliver a better outcome than a Nominal GDP Target? …if the Aggregate Supply curve is steep ( b is low, relative to a, the weight on the price stability objective) NGDPT gives exactly the right answer if equal weights (simple Taylor Rule) capture what discretion would do. Even if not exact, the “true” objective function would have to put far more weight on P than GDP, or AS would have to be very steep, for the P rule to give a better outcome.

57. Mathematical analysis: Which regime best achieves objectives of price stability and output stability? The goal: to minimize a quadratic loss function The goal: to minimize a quadratic loss function.

58. . Which regime best achieves objectives of price & output stability? continued

60. Estimating AS equation I have estimated the AS slope for a few EMs. I have estimated the AS slope for a few EMs. E.g., Kazakhstan, over the period 1993-2012. E.g., Kazakhstan, over the period 1993-2012. Exogenous terms of trade shocks: oil price fluctuations. Exogenous terms of trade shocks: oil price fluctuations. Exogenous demand shocks: changes in military spending and income of major trading partners. Exogenous demand shocks: changes in military spending and income of major trading partners. The estimated AS slope is 1.66, statistically < 2.41. The estimated AS slope is 1.66, statistically < 2.41. Supports the condition for NGDPT to dominate IT. Supports the condition for NGDPT to dominate IT. Conclusion: middle-size middle-income commodity- exporting countries should consider using nominal GDP as their target, in place of the CPI. Conclusion: middle-size middle-income commodity- exporting countries should consider using nominal GDP as their target, in place of the CPI.

61. Nominal GDP Targeting NGDPT is more robust with respect to supply shocks & terms of trade shocks, NGDPT is more robust with respect to supply shocks & terms of trade shocks, compared to the alternatives of IT or exchange rate targets. compared to the alternatives of IT or exchange rate targets. The logic holds whether the immediate aim is The logic holds whether the immediate aim is disinflation (as in 1980s, and again today among many EM & developing countries); disinflation (as in 1980s, and again today among many EM & developing countries); monetary stimulus (as among big Advanced Cs recently); monetary stimulus (as among big Advanced Cs recently); or just staying the course. or just staying the course.

62. How can countries that export commodities cope with the high volatility in their terms of trade? Recap: Four ideas that may help Micro: HedgeMacro: Counter- cyclical policy Tried & tested: 1. Use options (Mexico). 3. Fiscal: protect independence of forecasts (Chile). Untried: 2. Link debt to commodity price. 4. Monetary: target NGDP.

63. 63 References by the author Columns “Escaping the Oil Curse,” Project Syndicate, Dec.9, 2011. "Barrels, Bushels & Bonds: How Commodity Exporters Can Hedge Volatility," Oct.17, 2011. “Gulf Countries Urged to Switch Currency Peg to a Basket That Includes Oil,” VoxEU 7/9/08. “The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions,” 2012, in Commodity Price Volatility and Inclusive Growth in Low-Income Countries, R.Arezki et al., eds. (IMF); HKS RWP12-014. “How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?” in Natural Resources, Finance & Development. R.Arezki, T.Gylfason & A.Sy, eds. (IMF), 2011. HKS RWP 11-015. “On Graduation from Fiscal Procyclicality,” with Carlos Végh & Guillermo Vuletin, Journal of Development Economics, 100, no.1, 2013 ; pp.32-47. Summary, VoxEU, 2011. “A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile,” 2013, in Fiscal Policy and Macroeconomic Performance, L.F. Céspedes & J. Galí, eds., Central Bank of Chile 2011. Summary: Chile's Countercyclical Triumph," June 2012. "Nominal GDP Targeting for Developing Countries," with Pranjul Bhandari; NBER WP 20898, 2015. Summary at VoxEU 8/21/2014. HKS Summary. “A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity-Exporters in Latin America," Economia, 2011. http://www.hks.harvard.edu/fs/jfrankel/

64. 64 References by others Rabah Arezki and Kareem Ismail, 2013, “Boom-Bust Cycle, Asymmetrical Fiscal Response and the Dutch Disease,” J. Development Economics, Rabah Arezki and Kareem Ismail, 2013, “Boom-Bust Cycle, Asymmetrical Fiscal Response and the Dutch Disease,” J. Development Economics, March, 256-67. Christian Broda, 2004, "Terms of Trade and Exchange Rate Regimes in Developing Countries," Journal of International Economics, 63(1), 31-58. Christian Broda, 2004, "Terms of Trade and Exchange Rate Regimes in Developing Countries," Journal of International Economics, 63(1), 31-58. Luis Céspedes & Andrés Velasco, 2012, “Macroeconomic Performance During Commodity Price Booms and Busts,” IMF Economic Review. Luis Céspedes & Andrés Velasco, 2012, “Macroeconomic Performance During Commodity Price Booms and Busts,” IMF Economic Review. Graciela Kaminsky, Carmen Reinhart & Carlos Vegh, 2005, "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Macroeconomics Annual 2004, 19, 11-82. Graciela Kaminsky, Carmen Reinhart & Carlos Vegh, 2005, "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Macroeconomics Annual 2004, 19, 11-82. Jeffrey Sachs, 2007, “How to Handle the Macroeconomics of Oil Wealth,” in Escaping the Resource Curse, M.Humphreys, J.Sachs & J.Stiglitz, eds. (Columbia U. Press: NY), 173-93. Jeffrey Sachs, 2007, “How to Handle the Macroeconomics of Oil Wealth,” in Escaping the Resource Curse, M.Humphreys, J.Sachs & J.Stiglitz, eds. (Columbia U. Press: NY), 173-93.

65. 6565