The Natural Resource The Natural Resource Curse and How to Avoid Curse and How to Avoid

ItIt

MPA/ID extra lecture, Dec. 3, 2012MPA/ID extra lecture, Dec. 3, 2012

Jeffrey Frankel

Part I: Channels of the commodity curse

Part II: Policies & institutions to avoid the pitfalls

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The NaturalThe Natural ResourceResource

CurseCursePart I: ChannelsPart I: Channels

Some seminal references:Some seminal references: AutyAuty (1990, 2001, 2007) (1990, 2001, 2007)

Sachs & WarnerSachs & Warner (1995, 2001), (1995, 2001),

By now there is a large body of By now there is a large body of research, research, which I have surveyed which I have surveyed (2011, 2012a, b).(2011, 2012a, b).

Many countries that are richly endowed with oil, minerals, or fertile land have failed to grow more rapidly than those without.

Example:

Some studies find a negative effect of oil Some studies find a negative effect of oil in particularin particular, on economic performance:, on economic performance: including Kaldor, Karl & Said (2007); Ross (2001); including Kaldor, Karl & Said (2007); Ross (2001);

Sala-i-Martin Sala-i-Martin && Subramanian (2003); Subramanian (2003); and and Smith (2004).Smith (2004).

Some oil producers in Africa & the Middle East have relatively little to show for their resources.

Meanwhile, East Asian economies achieved western-level standards of living despite having virtually no exportable natural resources:

Japan, Singapore, Hong Kong, Korea &

Taiwan, rocky islands or peninsulas;

followed by China.

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Growth falls with fuelGrowth falls with fuel && mineral mineral exportsexports

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Are natural resources Are natural resources necessarilynecessarily bad? bad?

Commodity wealth needCommodity wealth need not necessarily lead not necessarily lead to inferior economic or political development. to inferior economic or political development.

Rather, it is a double-edged sword, Rather, it is a double-edged sword, with both benefits and dangers. with both benefits and dangers. It can be used for ill as easily as for good.It can be used for ill as easily as for good.

The priority should be on identifying ways The priority should be on identifying ways

to sidestep the pitfalls that haveto sidestep the pitfalls that have afflictedafflicted commoditycommodity producers in the past, producers in the past, to find the path of success. to find the path of success.

No, of course not.No, of course not.

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Some developing countries have avoided Some developing countries have avoided the pitfalls of commodity wealth.the pitfalls of commodity wealth.

E.g., Chile (copper)E.g., Chile (copper)

Botswana (diamonds)Botswana (diamonds)

Some of their innovations are worth emulating.Some of their innovations are worth emulating.

The 2The 2ndnd half of the lecture will offer some policies half of the lecture will offer some policies & institutional innovations to avoid the curse: & institutional innovations to avoid the curse:

especially ways of managing price volatility.especially ways of managing price volatility. Some lessons apply to commodity Some lessons apply to commodity importers importers too.too. Including lessons of policies to avoid.Including lessons of policies to avoid.

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But, 1But, 1stst: How could abundance : How could abundance of commodity wealth be a curse? of commodity wealth be a curse?

What is the mechanism What is the mechanism

for this counter-intuitive relationship? for this counter-intuitive relationship?

At least 5 categories of explanations.At least 5 categories of explanations.

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1.1. Volatility Volatility

2.2. Crowding-outCrowding-out of of manufacturingmanufacturing

3.3. Autocratic InstitutionsAutocratic Institutions

4.4. Anarchic InstitutionsAnarchic Institutions

5.5. ProcyclicalityProcyclicality includingincluding

1.1. Procyclical capital flowsProcyclical capital flows

2.2. Procyclical monetary policyProcyclical monetary policy

3.3. Procyclical fiscal policy.Procyclical fiscal policy.

5 Possible Natural Resource Curse Channels

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(1) Volatility (1) Volatility in global commodity in global commodity prices arises because prices arises because supply & demand are supply & demand are inelastic in the short inelastic in the short run. run.

Commodity prices have been especially volatile over the last

decade

Source: UNCTAD

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Effects of VolatilityEffects of Volatility

Volatility Volatility per seper se can be bad for economic growth. can be bad for economic growth. Hausmann & Rigobon Hausmann & Rigobon (2003),(2003), Blattman, Hwang, & Williamson Blattman, Hwang, & Williamson (2007),(2007),

and Poelhekke & van der Ploeg and Poelhekke & van der Ploeg (2007).(2007).

Risk inhibits private investment.Risk inhibits private investment.

Cyclical shifts of labor, land & capital back & Cyclical shifts of labor, land & capital back & forth across sectors may incur needless costs.forth across sectors may incur needless costs.

=> role for government intervention?=> role for government intervention? On the one hand, the private sector dislikes risk as On the one hand, the private sector dislikes risk as

much as government does & takes steps to mitigate it.much as government does & takes steps to mitigate it. On the other hand the government On the other hand the government

cannot entirely ignore the issue of volatility; cannot entirely ignore the issue of volatility; e.g., exchange rate policy.e.g., exchange rate policy.

2. Natural resources may 2. Natural resources may crowd outcrowd out

manufacturingmanufacturing,, and manufacturing could be the sector and manufacturing could be the sector

that experiences learning-by-doing that experiences learning-by-doing or dynamic productivity gains from spillover.or dynamic productivity gains from spillover. MatsuyamaMatsuyama (1992), (1992), vanvan WijnbergenWijnbergen (1984) (1984) andand SachsSachs && WarnerWarner

(1995).(1995).

So commodities could in theory be a dead-end So commodities could in theory be a dead-end sector.sector.

My own view: a country need not repress the My own view: a country need not repress the commoditycommodity sector to develop the manufacturingsector to develop the manufacturing

sector.sector. It can foster growth in both sectors.It can foster growth in both sectors.

E.g. Canada, Australia, Norway… Now Malaysia, Chile, Brazil…E.g. Canada, Australia, Norway… Now Malaysia, Chile, Brazil…

Econometric findings that oil

and other “point-source resources” lead to poor institutions

Isham, Woolcock, Pritchett, & Busby (2005) Sala-I-Martin & Subramanian (2003) Bulte, Damania & Deacon (2005)

Mehlum, Moene & Torvik (2006) Arezki & Brückner (2009).

The theory is thought to fit Mideastern oil The theory is thought to fit Mideastern oil exporters well.exporters well.

What are poor institutions?

A typical list: inequality, corruption, rent-seeking, intermittent dictatorship, ineffective judiciary branch, and lack of constraints to prevent elites & politicians from plundering the country.

An example, from economic

historians Engerman & Sokoloff (1997, 2000, 2002)

Why did industrialization take place in North America, not the South?

Lands endowed with extractive industries & plantation crops developed slavery, inequality, dictatorship, and state control,

whereas those climates suited to fishing & small farms developed institutions of individualism, democracy, egalitarianism, and capitalism.

When the Industrial Revolution came, the latter areas were well-suited to make the most of it.

Those that had specialized in extractive industries were not,

because society had come to depend on class structure & authoritarianism, rather than on individual incentive and decentralized decision-making.

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4. Anarchic institutions4. Anarchic institutions

1.1. Unsustainably rapid Unsustainably rapid depletion of resources depletion of resources

2.2. Unenforceable Unenforceable property rightsproperty rights

3.3. Civil warCivil war

See Appendix 2 for elaboration on each.

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(5) Procyclicality(5) Procyclicality The The Dutch DiseaseDutch Disease describes unwanted describes unwanted

side-effects of a commodity boom.side-effects of a commodity boom.

Developing countries are Developing countries are historically pronehistorically prone to to procyclicality,procyclicality, especially commodity producers.especially commodity producers.

ProcyclicalityProcyclicality in: in: Capital inflows; Monetary policy;Capital inflows; Monetary policy; Real exchangeReal exchange rate; Nontraded Goodsrate; Nontraded Goods Fiscal PolicyFiscal Policy

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The Dutch Disease: The Dutch Disease: 5 side-effects of a commodity 5 side-effects of a commodity

boomboom

1) A real appreciation in the 1) A real appreciation in the currency currency

2) A rise in government spending 2) A rise in government spending 3) A rise in nontraded goods prices 3) A rise in nontraded goods prices

4) A resultant shift of production 4) A resultant shift of production out of manufactured goods out of manufactured goods

5) Sometimes a current account 5) Sometimes a current account deficitdeficit

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The Dutch Disease: The 5 effects elaboratedThe Dutch Disease: The 5 effects elaborated

1) Real appreciation in the 1) Real appreciation in the currencycurrency

taking the form of nominal currency taking the form of nominal currency appreciation appreciation if the exchange rate floatsif the exchange rate floats

or the form of money inflows, credit or the form of money inflows, credit & inflation if the exchange rate is fixed;& inflation if the exchange rate is fixed;

2) A rise in government spending 2) A rise in government spending in response to availability of tax receipts or royalties.in response to availability of tax receipts or royalties.

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The Dutch Disease: 5 side-effects of a commodity boomThe Dutch Disease: 5 side-effects of a commodity boom

3) An increase in nontraded goods 3) An increase in nontraded goods pricesprices relative to internationally traded goodsrelative to internationally traded goods

4) A resultant shift out of 4) A resultant shift out of non-commodity traded goods,non-commodity traded goods,

esp. manufactures,esp. manufactures,

pulled by the more pulled by the more attractive returns attractive returns in the export commodity in the export commodity and in non-traded goodsand in non-traded goods..

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The Dutch The Dutch Disease: 5 side-effects of a commodity boomDisease: 5 side-effects of a commodity boom

5) A current account deficit,5) A current account deficit, as booming countries attract capital as booming countries attract capital flows,flows,

thereby incurring international debt thereby incurring international debt that that is hard to service when the boom is hard to service when the boom ends.ends.

Manzano & Rigobon (2008): the negative Sachs-Warner effect of resources on growth rates during 1970-1990 was mediated through international debt incurred when commodity prices were high.

Arezki & Brückner (2010a, b): commodity price booms lead to higher government spending, external debt & default risk in autocracies,

but do not have those effects in democracies.

Procyclical capital flows According to intertemporal optimization theory,

capital flows should be countercyclical: net capital inflows when exports are doing badly and net capital outflows 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).

Invalidates much of existing theory, though certainly not all. Theories to explain this involve

capital market imperfections, e.g., asymmetric information or the need for collateral.

Procyclical monetary policy

If the exchange rate is fixed, surpluses during commodity booms

lead to rising reserves and money supply. possibly delayed by sterilization attempts.

Example: Gulf States during recent oil booms.

Floating can help, accommodating trade shock. But,

under pure floating: appreciation can be excessive. under IT: CPI rule says to tighten money & appreciate

when import commodity price goes up (or other adverse supply shock).

That’s backwards. (E.g., oil importers in 2008.) Should appreciate when export commodity price goes up.

Procyclical real exchange rate

Countries undergoing a commodity boom experience real appreciation of

their currency taking the form of nominal currency taking the form of nominal currency

appreciationappreciation for floating-rate commodity exporters, for floating-rate commodity exporters,

Colombia, Kazakhstan, Russia, S.Africa, Chile, Brazil…. Colombia, Kazakhstan, Russia, S.Africa, Chile, Brazil….

or the form of money inflows & inflationor the form of money inflows & inflation for fixed-rate commodity exporters,for fixed-rate commodity exporters,

Saudi Arabia & UAE….Saudi Arabia & UAE….OK. But real appreciation adds to boom in NTGs.

Procyclical fiscal policy

Fiscal policy has historically tended Fiscal policy has historically tended to be procyclical in developing countries to be procyclical in developing countries especially among commodity exporters:especially among commodity exporters: Cuddington (1989), Tornell & Lane (1999), Kaminsky, Cuddington (1989), Tornell & Lane (1999), Kaminsky,

Reinhart & Vegh (2004), Talvi & Végh (2005), Alesina, Reinhart & Vegh (2004), Talvi & Végh (2005), Alesina, Campante & TabelliniCampante & Tabellini (2008), Mendoza & Oviedo (2006), (2008), Mendoza & Oviedo (2006), Ilzetski & Vegh (2008), Medas & Zakharova (2009), Gavin & Ilzetski & Vegh (2008), Medas & Zakharova (2009), Gavin & Perotti (1997).Perotti (1997).

Correlation of income & spending mostly Correlation of income & spending mostly positive –positive –

particularly in comparison with industrialized countries.particularly in comparison with industrialized countries.

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The procyclicality of fiscal policyThe procyclicality of fiscal policy

A reason for procyclical public A reason for procyclical public spending: spending: receipts from taxesreceipts from taxes && royalties rise in royalties rise in booms.booms.

The government cannot resist the temptation The government cannot resist the temptation to increase spending proportionately, or to increase spending proportionately, or more.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.

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Two budget items account for much Two budget items account for much

of the spending from oil booms:of the spending from oil booms: (i) Investment projects.(i) Investment projects.

Investment in practice may be Investment in practice may be “white“white elephant” projects,elephant” projects,

which are stranded without funds which are stranded without funds for completion or maintenance for completion or maintenance when the oil price goes back down.when the oil price goes back down.

Gelb Gelb (1986).(1986).

(ii) The government wage bill.(ii) The government wage bill. Oil windfalls are often spent on public sector Oil windfalls are often spent on public sector

wages. wages. Medas & Zakharova Medas & Zakharova (2009) (2009)

Arezki & IsmailArezki & Ismail (2010)(2010): : government spending rises in booms, but is downward-sticky.

Rumbi Sithole took this photo in “Bayelsa Statein 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..”

Correlations between Gov.t Spending & GDP1960-1999p

rocyc

lica

l }G always used to be pro-cyclical

for most developing countries.

cou

nte

rcyc

lica

l

Adapted from Kaminsky, Reinhart & Vegh (2004)

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An important development -- An important development -- some developing countries, including some developing countries, including commodity producers, were able to break commodity producers, were able to break

the historic pattern in the most recent the historic pattern in the most recent decade:decade: taking advantage of the boom of 2002-2008taking 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 thereby earning the ability to expand fiscally in the 2008-09 crisis.fiscally in the 2008-09 crisis.

Chile is the outstanding model. Chile is the outstanding model. Also Botswana, China, Indonesia, Korea…Also Botswana, China, Indonesia, Korea…

The procyclicality of fiscal policy,The procyclicality of fiscal policy, contcont..

Correlations between Government spending & GDP 2000-2009

In the last decade, about 1/3 developing countries

switched to countercyclical fiscal policy:Negative correlation of G & GDP.

Frankel, Vegh & Vuletin (2012)

pro

cyc

lica

lcou

nte

rcyc

lica

l

Summary of Part I Five broad categories of hypothesized channels

whereby natural resources can lead to poor economic performance: commodity price volatility, crowding out of manufacturing, autocratic institutions, anarchic institutions, and procyclical macroeconomic policy, including

capital flows, monetary policy and fiscal policy.

But the important question is how to avoid the pitfalls, to achieve resource blessing instead of resource curse.

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Appendix 1: I exclude a 6th channel,

The Prebisch-Singer (1950) Hypothesis

that commodities supposedly suffer a long-run downward relative price trend. Theoretical reasoning: world demand for

primary products is inelastic with respect to income.

Vs. persuasive theoretical arguments that we should expect commodity prices to show upward trends in the long run Malthus (esp. for food) Hotelling (for depletable resources).

The up trend idea goes back to Malthus (1798) and early fears of environmental scarcity: Demand grows with population

(geometrically), Supply does not. What could be clearer in economics than the prediction that price will rise?

Hotelling (1931)

Firms choose how fast to extract oil or minerals King Abdullah of Saudi Arabia, with interest rates ≈ 0 in

2008,apparently believed that the rate of return on oil reserves was higher if he didn't pump than if he did:   

"Let them remain in the ground for our children and grandchildren..."

Arbitrage => expected rate of price increase = interest

rate.

The empirical evidence

With strong theoretical arguments on both sides, either for an upward trend or for a downward trend, it is an empirical question.

Terms of trade for commodity producers had a slight up trend from 1870 to World War I, a down trend in the inter-war period, up in the 1970s, down in the 1980s and 1990s, and up in the first decade of the 21st century.

What is the overall statistical trend

in commodity prices in the long run?

Some authors find a slight upward trend, some a slight downward trend. [1]

The answer depends on the date of the end of the sample.

[1] Cuddington (1992), Cuddington, Ludema & Jayasuriya (2007), Cuddington & Urzua (1989), Grilli & Yang (1988), Pindyck (1999), Reinhart & Wickham (1994), Hadass & Williamson (2003), Kellard & Wohar (2005), Balagtas & Holt (2009), Cuddington & Jerrett (2008), and Harvey, Kellard, Madsen & Wohar (2010).

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4.1 4.1 Unsustainably Unsustainably rapid depletion rapid depletion

When exhaustible resources When exhaustible resources are in fact exhausted, are in fact exhausted, the country may be left with nothing.the country may be left with nothing.

Three concerns:Three concerns: Protection of Protection of environmental qualityenvironmental quality..

A motivation A motivation forfor a a strategy strategy of of economic economic diversificationdiversification..

The need to save for the day of depletion The need to save for the day of depletion Invest rents from exhaustible resources in other assets. Invest rents from exhaustible resources in other assets.

Hartwick (1977) and Solow (1986).

Appendix 2: Elaboration on Anarchy:insufficient protection of property rights

The example of Nauruphosphate mining

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4.2 Unenforceable property 4.2 Unenforceable property rightsrights

Depletion would be much less of a problem Depletion would be much less of a problem if full property rights could be enforced, if full property rights could be enforced, thereby giving the owners incentive thereby giving the owners incentive

to conserve the resource in question.to conserve the resource in question.

But often this is not possibleBut often this is not possible especially under frontier conditions.especially under frontier conditions.

Overfishing, overgrazing, & over-logging are classic Overfishing, overgrazing, & over-logging are classic examples of the “tragedy of the commons.” examples of the “tragedy of the commons.”

Individual fisherman, ranchers, loggers, or miners, Individual fisherman, ranchers, loggers, or miners, have no incentive to restrain themselves, while the have no incentive to restrain themselves, while the fisheries, pastureland or forests are collectively fisheries, pastureland or forests are collectively depleted.depleted.

Madre de Dios region of the Amazon rainforest in Peru,

the left-hand side stripped by illegal gold mining.

http://indiancountrytodaymedianetwork.com/2011/02/27/amazon-gold-rush-laying-waste-to-peruvian-rainforest%E2%80%99s-madre-de-dios-20021

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4.3 War4.3 War Where a valuable resource such as oil or Where a valuable resource such as oil or

diamonds diamonds is there for the taking, factions will likely fight is there for the taking, factions will likely fight over it. over it.

Oil & minerals are correlated with civil war.Oil & minerals are correlated with civil war. Fearon & Laitin Fearon & Laitin (2003),(2003), Collier Collier & & Hoeffler Hoeffler (2004),(2004),

Humphreys Humphreys (2005) (2005) and Collier and Collier (2007).(2007).

Chronic conflict in places Chronic conflict in places such as Sudan comes to mind.such as Sudan comes to mind.

Civil war is, in turn, very bad Civil war is, in turn, very bad for economic development.for economic development.

Appendix 3:The NRC Skeptics

Which comes first, oil or institutions?

Some question the assumption that oil discoveries are exogenous and institutions endogenous.

Oil wealth is not necessarily the cause and institutions the effect, rather than the other way around. Norman (2009): the discovery & development of oil

is not purely exogenous, but rather is endogenous with respect to the efficiency of the economy.

in which case it is put to use for the national

welfare, instead of the welfare of an elite.

Mehlum, Moene & Torvik (2006), Robinson, Torvik & Verdier (2006), McSherry (2006), Smith (2007) and Collier & Goderis (2007).

The important determinant is whether the country already has good

institutions at the time that oil is discovered,

Skeptics argue that commodity exports are endogenous.

On the one hand, basic trade theory says:A country may show a high mineral share in exports, not necessarily because it has a higher endowment of minerals than others (absolute advantage) but because it does not have the ability to export manufactures (comparative advantage).

This could explain negative statistical correlations between mineral exports and economic development, invalidating the common inference that minerals are bad for

growth.

Maloney (2002) and Wright & Czelusta (2003, 04, 06).

Commodity exports are endogenous, continued.

On the other hand, skeptics also have plenty of examples where successful institutions and industrialization went hand in hand with rapid development of mineral resources.

Countries that were able to develop efficiently their resource endowments as part of strong economy-wide growth include:

the USA during its pre-war industrialization period David & Wright (1997).

Venezuela from the 1920s to the 1970s, Australia since the 1960s, Norway since 1969 oil discoveries, Chile since adoption of a new mining code in 1983, Peru since a privatization program in 1992, and Brazil since lifting restrictions on foreign mining participation in 1995.

Wright & Czelusta (2003, pp. 4-7, 12-13, 18-22).

Commodity exports are endogenous, continued.

Examples of countries that were equally well-endowed geologically but that failed to develop their natural resources efficiently include:

Chile & Australia before World War I,

and Venezuela since the 1980s. Hausmann (2003, p.246): “Venezuela’s growth collapse

took place after 60 years of expansion, fueled by oil. If oil explains slow growth, what explains the previous fast growth?”

Addendum: Countries with high resourceAddendum: Countries with high resource rents rents (as(as

%% of GDPof GDP) )

tend to have lower student math performancetend to have lower student math performance(statistically significant at the .003 level)(statistically significant at the .003 level)

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Source: OECD education data featured in  Knowledge and skills are infinite – oil is not by Andreas Schleicher.

Part II

Some that are not recommended: Institutions that try to suppress price

volatility.

Recommended:

Devices to hedge risk.

Ideas to reduce macroeconomic procyclicality.

Institutions for better governance.

Policies & institutions to avoidpitfalls of the Natural Resource

Curse

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The Natural Resource Curse should The Natural Resource Curse should not be interpreted as a rule that not be interpreted as a rule that

commodity-rich countries are commodity-rich countries are doomed to fail.doomed to fail.

The question is what policies to adopt The question is what policies to adopt to avoid the pitfalls and improve the chances of prosperity. to avoid the pitfalls and improve the chances of prosperity.

A wide variety of measures have been A wide variety of measures have been tried by commodity-exporters cope tried by commodity-exporters cope with volatility.with volatility.

Some work better than others.Some work better than others.

Many of the policies that have Many of the policies that have been intended to suppress been intended to suppress

commodity volatility do not work commodity volatility do not work out so wellout so well

Producer subsidies Stockpiles Marketing boards Price controls Export controls

Blaming derivatives Resource nationalism Nationalization Banning foreign

participation

Devices to share risksDevices to share risks

1.1. Index contracts with foreign Index contracts with foreign companiescompanies(royalties…) to the world commodity (royalties…) to the world commodity price.price.

2.2. Hedge commodity revenues Hedge commodity revenues in options marketsin options markets

3.3. Link debt to the commodity priceLink debt to the commodity price

7 recommendations for commodity-exporting countries

4. Allow some currency appreciation in response 4. Allow some currency appreciation in response to a commodity boom, to a commodity boom, but not a free float. but not a free float.

- Accumulate some forex reserves first.- Accumulate some forex reserves first.- Raise banks’ reserve requirements, esp. on $ liabilities.- Raise banks’ reserve requirements, esp. on $ liabilities.

5. If the monetary anchor is to be Inflation Targeting, 5. If the monetary anchor is to be Inflation Targeting, consider using as the target, in place of the CPI, consider using as the target, in place of the CPI, a price measure that puts weight a price measure that puts weight on the export commodity (Pon the export commodity (Productroduct PPricerice TTargetingargeting).).

6. Emulate Chile: to avoid over-spending in boom 6. Emulate Chile: to avoid over-spending in boom times, allow deviations from a target surplus only times, allow deviations from a target surplus only in response to in response to permanentpermanent commodity price rises commodity price rises..

7 recommendations for commodity producers continued

Countercyclical macroeconomic Countercyclical macroeconomic policypolicy

PPT

7. Manage commodity7. Manage commodity funds professionally.funds professionally.

Invest them abroadInvest them abroad like Norway’s Pension Fund,like Norway’s Pension Fund, Reasons:Reasons:

(1) for diversification,(1) for diversification, (2) to avoid cronyism in investments.(2) to avoid cronyism in investments.

butbut insulated from politics insulated from politics like Botswana’s Pula Fund.like Botswana’s Pula Fund. Professionally managed, to optimize financially.Professionally managed, to optimize financially.

7 recommendations for commodity producers, concluded

Good governance Good governance institutionsinstitutions

Elaboration on two proposals to reduce the procyclicality of

macroeconomic policy for commodity exporters

I) To make monetary policy less procyclical: Product Price Targeting

II) To make fiscal policy less procyclical: emulate Chile.

PPT

I) The challenge of designinga currency regime for countries where

terms of trade shocks dominate the cycle

Fixing the exchange rate leads to procyclical monetary policy: credit expands in commodity booms.

Floating accommodates terms of trade shocks. But volatility can be excessive; also floating does not provide a nominal anchor.

Inflation Targeting, in terms of the CPI, provides a nominal anchor; but can react perversely to terms of trade shocks.

Needed: an anchor that accommodates trade shocks

Product Price Targeting:Target an index of domestic production

prices [1]

such as the GDP deflator

• Include export commodities in the index and exclude import commodities,

• so money tightens & the currency appreciates when world prices of export commodities rise

• accommodating the terms of trade --• not when world prices of import commodities

rise.

• The CPI does it backwards:• It calls for appreciation when import prices rise,• not when export prices rise !

[1] Frankel (2011, 2012).

PPT

Appendix II: Who achieves counter-cyclical fiscal

policy?Countries with “good institutions”

”On Graduation from Fiscal Procyclicality” 2013, Frankel with C.Végh & G.Vuletin; J.Dev.Economics.

What, What, specificallyspecifically, are good institutions?, are good institutions?

   

11st st rule – Governments must set a budget target,rule – Governments must set a budget target, set = 0 in 2008 under Pres. Bachelet.set = 0 in 2008 under Pres. Bachelet.    

   

22ndnd rule – The target is structural: rule – The target is structural: Deficits allowed only to the extent thatDeficits 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.

33rdrd rule – rule – The trends are projected by 2 panels The trends are projected by 2 panels of independentof independent experts, outside experts, outside thethe political political process.process. Result: Chile avoids the pattern of 32 other Result: Chile avoids the pattern of 32 other

governments, governments, where forecasts in booms are biased toward over-where forecasts in booms are biased toward over-

optimism.optimism. Chile ran surpluses in the 2003-07 boom,Chile ran surpluses in the 2003-07 boom,

while the U.S. & Europe failed to do so.while the U.S. & Europe failed to do so.

The example of Chile since The example of Chile since 20002000

Appendiceson recommendations for

dealing with the natural resource curse

Appendix 4: Policies not recommended

Appendix 5: Elaboration on proposal to make monetary policy less procyclical – PPT, using GDP deflator to set annual inflation target.

Appendix 6: Elaboration on proposal to make fiscal policy less procyclical – emulate Chile, setting structural targets with independent fiscal forecasts

Appendix 4: Appendix 4: Policies that have been Policies that have been

triedtriedbut that are not but that are not recommendedrecommended

Producer subsidies Stockpiles Marketing boards Price controls Export controls

Blaming derivatives Resource nationalism Nationalization Banning foreign

participation

Unsuccessful policies to reduce commodity price Unsuccessful policies to reduce commodity price volatility:volatility:

1) Producer1) Producer subsidies subsidies toto ““stabilizestabilize” ” prices at highprices at high levels, levels, often via wasteful stockpiles & protectionist import often via wasteful stockpiles & protectionist import

barriers.barriers.

Examples:Examples: The EU’s Common Agricultural PolicyThe EU’s Common Agricultural Policy

Bad for EU budgets, economic efficiency, Bad for EU budgets, economic efficiency, international trade & consumer pocketbooks.international trade & consumer pocketbooks.

Or fossil fuel subsidiesOr fossil fuel subsidies which are equally distortionary & budget-busting,which are equally distortionary & budget-busting, and disastrous for the environment as well.and disastrous for the environment as well.

Or US corn-based ethanol subsidies, Or US corn-based ethanol subsidies, with tariffs on Brazilian sugar-based ethanol.with tariffs on Brazilian sugar-based ethanol.

Unsuccessful policies, Unsuccessful policies, continuedcontinued

2) Price controls to “stabilize” prices at low 2) Price controls to “stabilize” prices at low levelslevels Discourage investment & productionDiscourage investment & production..

Example: African countries adopted Example: African countries adopted commodity boards for coffee & cocoa commodity boards for coffee & cocoa at the time of independence. at the time of independence.

The original rationale: to buy the crop in years The original rationale: to buy the crop in years of excess supply and sell in years of excess of excess supply and sell in years of excess demand.demand.

In practice the price paid to cocoa & coffee farmers In practice the price paid to cocoa & coffee farmers

was always below the world price.was always below the world price. As a result, production fell.As a result, production fell.

Microeconomic policies, Microeconomic policies, continuedcontinued

Often the goal of price controls is to shield Often the goal of price controls is to shield consumers of stapleconsumers of staple foodsfoods && fuel from fuel from increasesincreases. .

But the artificially suppressed priceBut the artificially suppressed price discourages domestic supply, anddiscourages domestic supply, and requires rationing to domestic households.requires rationing to domestic households.

Shortages & long lines can fuel political Shortages & long lines can fuel political rage as well as higher prices can.rage as well as higher prices can.

Not to mention when the government Not to mention when the government is forced by huge gaps to raise prices.is forced by huge gaps to raise prices.

Price controls can also require imports, Price controls can also require imports, to satisfy excess demand. to satisfy excess demand.

Then they raise the world price even more.Then they raise the world price even more.

Microeconomic policies, Microeconomic policies, continuedcontinued

3) In producing countries, prices are 3) In producing countries, prices are artificially suppressed by means of artificially suppressed by means of export controls export controls to insulate domestic consumers from a price to insulate domestic consumers from a price

rise. rise. In 2008, India capped rice exports. In 2008, India capped rice exports. Argentina did the same for wheat exports, Argentina did the same for wheat exports, as did Russia in 2010.as did Russia in 2010. India banned cotton exports in March 2012.India banned cotton exports in March 2012.

Results: Results: Domestic supply is discouraged.Domestic supply is discouraged. World prices go even higher.World prices go even higher.

An initiative at the An initiative at the G20 meetings in G20 meetings in

France France in 2011 deserved in 2011 deserved

to succeed:to succeed: Producers and consuming countries in grain Producers and consuming countries in grain

markets should cooperatively agree to markets should cooperatively agree to refrain from export controls and price refrain from export controls and price controls.controls. The result would be The result would be lowerlower world price volatility. world price volatility.

One hopes for steps in this direction, One hopes for steps in this direction, perhaps working through the WTO.perhaps working through the WTO.

An initiative that has less merit:

4) Attempts to blame speculation for volatility and so to ban derivatives markets.

Yes, speculative bubbles sometimes hit prices.

But in commodity markets, prices are more often the signal for fundamentals.

Don’t shoot the messenger. Also, derivatives are useful for hedgers.

An example of commodity speculation

In the 1955 movie version In the 1955 movie version of of East of EdenEast of Eden, the legendary , the legendary James Dean plays Cal.James Dean plays Cal.   

Like Cain in Genesis, he Like Cain in Genesis, he competes with his brother for competes with his brother for the love of his father. the love of his father.    

Cal “goes long” in the market Cal “goes long” in the market for beans, in anticipation of for beans, in anticipation of a rise in demand if the US a rise in demand if the US enters WWI.enters WWI.  

An example of commodity speculation, cont.

Sure enough, the price of beans goes sky high, Sure enough, the price of beans goes sky high, Cal makes a bundle, and offers it to his father, Cal makes a bundle, and offers it to his father, a moralizing patriarch. a moralizing patriarch. 

But the father is morally offended by Cal’s But the father is morally offended by Cal’s speculation, speculation, not wanting to profit not wanting to profit from others’ misfortunes, from others’ misfortunes, and tells him he will have and tells him he will have to “giveto “give thethe moneymoney back.” back.” 

Cal has been the agent of Cal has been the agent of AdamAdam SmithSmith’’s famous invisibles famous invisible hand: hand: By betting on his hunch about By betting on his hunch about

the future, he has contributed the future, he has contributed to upward pressure on the price to upward pressure on the price of beans in the present, of beans in the present,

thereby increasing the supply so that more thereby increasing the supply so that more is available precisely when needed (by the Army). is available precisely when needed (by the Army). 

The movie even treats us to a scene where Cal The movie even treats us to a scene where Cal watches the beans grow in a farmer’s field, watches the beans grow in a farmer’s field, something real-life speculators seldom get to see.something real-life speculators seldom get to see.

An example of commodity speculation, cont.

The overall lesson for microeconomic policyThe overall lesson for microeconomic policy

Attempts to prevent Attempts to prevent commodity prices from commodity prices from fluctuating generally fail.fluctuating generally fail.

Even though enacted in the name of reducing volatility Even though enacted in the name of reducing volatility & income inequality, their effect is often different.& income inequality, their effect is often different.

Better to accept volatility and cope with it.Better to accept volatility and cope with it.

For the poor: well-designed transfers,For the poor: well-designed transfers, along the lines of Oportunidades or Bolsa Familia.along the lines of Oportunidades or Bolsa Familia.

“Resource nationalism”

Another motive for commodity export controls:

5) To subsidize downstream industries. E.g., “beneficiation” in South African

diamonds But it didn’t make diamond-cutting competitive, and it hurt mining exports.

6) Nationalization of foreign companies. Like price controls,

it discourages investment.

“Resource nationalism” continued

7) Keeping out foreign companies altogether. But often they have the needed technical expertise. Examples: declining oil production in Mexico & Venezuela.

8) Going around “locking up” resource supplies. China must think that this strategy will

protect it in case of a commodity price shock. But global commodity markets are increasingly

integrated. If conflict in the Persian Gulf doubles world oil prices,

the effect will be pretty much the same for those who buy on the spot market and those who have bilateral arrangements.

The overall lesson for The overall lesson for microeconomic policymicroeconomic policy

Attempts to prevent Attempts to prevent commodity prices from commodity prices from fluctuating generally fail.fluctuating generally fail.

Even though enacted Even though enacted in the name of reducing volatility & income in the name of reducing volatility & income inequality, their effect is often different.inequality, their effect is often different.

Better to accept volatility and cope with it.Better to accept volatility and cope with it. For the poor: well-designed transfers,For the poor: well-designed transfers,

along the lines of Oportunidades or Bolsa Familia.along the lines of Oportunidades or Bolsa Familia.

Appendix 5: Product Price Targeting

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, which is backwards. Targeting core CPI does not much help.

Professor Jeffrey Frankel

Targeted variable

Vulnerability Example

Gold standard

Price of gold

Vagaries of world gold market

1849 boom; 1873-96 bust

Commodity standard

Price of agric. & mineral

basket

Shocks in imported

commodity

Oil shocks of 1973-80, 2000-11

Monetarist rule M1 Velocity shocks US 1982

Nominal income targeting

Nominal GDP

Measurement problems

Less developed countries

Fixed exchange rate

$ (or €)

Appreciation of $ (or € )

EM currency crises 1995-2001

Inflation targeting CPI

Terms of trade shocks

Oil shocks of 1973-80, 2000-11

6 proposed nominal targets and the Achilles heel of each:Vulnerability

Why is PPT better than a fixed exchange ratefor countries with volatile export prices?

Better response to trade shocks (countercyclical):

If the $ price of the export commodity goes up, the currency automatically appreciates, moderating the boom.

If the $ price of the export commodity goes down, the currency automatically depreciates, moderating the downturn & improving the balance of payments.

PPT

Why is PPT better than CPI-targetingfor countries with volatile terms of trade?

Better response to trade shocks (accommodating):

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.

PPT

Empirical findings

Simulations of 1970-2000 Gold producers:

Burkino Faso, Ghana, Mali, South Africa Other commodities:

Ethiopia (coffee), Nigeria (oil), S.Africa (platinum)

General finding: Under Product Price Targets, their currencies would have depreciated automatically in 1990s when commodity prices declined,

perhaps avoiding messy balance of payments crises.

Sources: Frankel (2002, 03a, 05), Frankel & Saiki (2003)

Price indices

CPI & GDP deflator each include: an international good

import good in the CPI, export good in GDP deflator;

And the non-traded good, with weights f and (1-f), respectively:

cpi = (f)pim +(1-f)pn , p = (f)px + (1-f) pn .

Estimation for each country of weights in national price index on 3 sectors: non tradable goods, leading commodity export, & other tradable goods

Non Tradables

Leading Comm. Export

OilOther

TradablesTotal

CPI 0.6939 0.0063 0.0431 0.2567 1.000PPI 0.6939 0.0391 0.0230 0.2440 1.000CPI 0.5782 0.0163 0.0141 0.3914 1.000PPI 0.5782 0.1471 0.0235 0.2512 1.000CPI 0.5235 0.0079 0.0608 0.4078 1.000PPI 0.5235 0.0100 0.1334 0.3332 1.000CPI 0.5985 -- 0.0168 0.3847 1.000PPI 0.5985 -- 0.0407 0.3608 1.000CPI 0.6413 0.0002 0.0234 0.3351 1.000PPI 0.6413 0.1212 0.0303 0.2072 1.000CPI 0.3749 -- 0.0366 0.5885 1.000PPI 0.3749 -- 0.0247 0.6003 1.000CPI 0.3929 0.1058 0.0676 0.4338 1.000PPI 0.3929 0.0880 0.0988 0.4204 1.000CPI 0.6697 0.0114 0.0393 0.2796 1.000PPI 0.6697 0.040504 0.021228 0.268568 1.000CPI 0.6230 0.0518 0.0357 0.2895 1.000PPI 0.6230 0.2234 0.1158 0.0378 1.000

* Oil is the leading commodity export.

PRY

PER

URY

ARG

BOL

CHL

COL*

JAM

MEX*

Argentina is relatively closed;

The leading export commodity usually has a higher weight in the country’s PPI

than in its CPI, as expected.

(Jamaicans don’t eat bauxite.)

Mexico is relatively open.

“A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity-Exporters in Latin America," Economia, vol.11, 2011 (Brookings), NBER WP 16362.  

In practice, IT proponents agree central banks should not tighten to offset oil price

shocks

They want focus on core CPI, excluding food & energy.

But food & energy ≠ all supply shocks.

Use of core CPI sacrifices some credibility: If core CPI is the explicit goal ex ante, the public feels

confused. If it is an excuse for missing targets ex post, the public feels

tricked.

Perhaps for that reason, IT central banks apparently do respond to oil shocks by tightening/appreciating,

as the following correlations suggests….

Table 1: LACA Countries’ Current Regimes and Monthly Correlations of Exchange Rate Changes ($/local currency) with Dollar Import Price Changes

Import price changes are changes in the dollar price of oil.

  Exchange Rate Regime Monetary Policy 1970-1999 2000-2008 1970-2008

ARG Managed floating Monetary aggregate target -0.0212 -0.0591 -0.0266

BOL Other conventional fixed peg Against a single currency -0.0139 0.0156 -0.0057

BRA Independently floating Inflation targeting framework (1999) 0.0366 0.0961 0.0551

CHL Independently floating Inflation targeting framework (1990)* -0.0695 0.0524 -0.0484

CRI Crawling pegs Exchange rate anchor 0.0123 -0.0327 0.0076

GTM Managed floating Inflation targeting framework -0.0029 0.2428 0.0149

GUY Other conventional fixed peg Monetary aggregate target -0.0335 0.0119 -0.0274

HND Other conventional fixed peg Against a single currency -0.0203 -0.0734 -0.0176

JAM Managed floating Monetary aggregate target 0.0257 0.2672 0.0417

NIC Crawling pegs Exchange rate anchor -0.0644 0.0324 -0.0412

PER Managed floating Inflation targeting framework (2002) -0.3138 0.1895 -0.2015

PRY Managed floating IMF-supported or other monetary program -0.023 0.3424 0.0543

SLV Dollar Exchange rate anchor 0.1040 0.0530 0.0862

URY Managed floating Monetary aggregate target 0.0438 0.1168 0.0564

Oil Exporters        

COL Managed floating Inflation targeting framework (1999) -0.0297 0.0489 0.0046

MEX Independently floating Inflation targeting framework (1995) 0.1070 0.1619 0.1086

TTO Other conventional fixed peg Against a single currency 0.0698 0.2025 0.0698

VEN Other conventional fixed peg Against a single currency -0.0521 0.0064 -0.0382

* Chile declared an inflation target as early as 1990; but it also had an exchange rate target, under an explicit band-basket-crawl regime, until 1999. 

LAC Countries’ Current Regimes and Monthly Correlations of Exchange Rate Changes ($/local currency) with $ Import Price Changes

Table 1

ITcoun-triesshowcorrel-ations> 0.

The 4 inflation-targeters in Latin America

show correlation (currency value in $ , import prices in $) > 0 ;

> correlation before they adopted IT;

> correlation shown by non-IT Latin American oil-importing countries.

Why is the correlation between the import price and the currency value

revealing? The currency of an oil importer should

not respond to an increase in the world oil price by appreciating, to the extent that these central banks target core CPI .

When these IT currencies respond by appreciating instead, it suggests that the central bank is tightening money to reduce upward pressure on headline CPI.

Appendix 6: Chilean fiscal policy

In 2000 Chile instituted its structural budget rule.

The institution was formalized in law in 2006.

The structural budget deficit must be zero, originally BS > 1% of GDP, then cut to ½ %, then 0 -- 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.

The crucial institutional innovation in Chile

How has Chile avoided over-optimistic official forecasts? especially the historic pattern of

over-exuberance in commodity booms?

The estimation of the long-term path for GDP & the copper price is made by two panels of independent experts, and thus is insulated from political pressure & wishful thinking.

Other countries might usefully emulate Chile’s innovation or in other ways delegate to independent agencies

estimation of structural budget deficit paths.

Chile’s fiscal position strengthened immediately: Public saving rose from 2.5 % of GDP in 2000 to 7.9 % 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 via fiscal expansion.

The Pay-off

In 2008, with copper prices spiking up, the government of President Bachelet had beenunder intense pressure to spend the revenue. She & Fin.Min.Velasco held to the rule, saving most of it. Their popularity ratings 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 in 2009.

Evolution of approval and disapproval of four Chilean presidents

Presidents Patricio Aylwin, Eduardo Frei, Ricardo Lagos and Michelle BacheletData: CEP, Encuesta Nacional de Opinion Publica, October 2009, www.cepchile.cl. Source: Engel et al (2011).

5 econometric findings regarding bias toward optimism in official budget forecasts.

Official forecasts in a sample of 33 countries on average are overly optimistic, for:

(1) budgets & (2) GDP .

The bias toward optimism is: (3) stronger the longer the forecast horizon; (4) greater in booms (5) greater for euro governments under SGP budget rules;

(4) The optimism in official budget forecasts is stronger at the 3-year horizon, stronger amongcountries with budget rules, & stronger in booms.

Frankel, 2012, “A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile.”

Budget balance forecast error as % of GDP, Full dataset

(1) (2) (3)

One year ahead Two years ahead Three years ahead

GDP relative to trend

0.093***(0.019)

0.258***(0.040)

0.289***(0.063)

Constant 0.201 0.649*** 1.364***(0.197) (0.231) (0.348)

Observations 398 300 179Variable is lagged so that it lines up with the year in which the forecast was made.*** p<0.01 Robust standard errors in parentheses, clustered by country.

(4) Official budget forecasts are biasedmore if GDP is currently high & especially at

longer horizons

33 countries

Budget balance forecast error as a % of GDP, Full Dataset

(1) (2) (3) (4)

One year ahead

Two years ahead

One year ahead

Two years ahead

SGPdummy 0.658 0.905** 0.407 0.276(0.398) (0.406) (0.355) (0.438)

SGP dummy * (GDP - trend)

0.189**(0.0828)

0.497***(0.107)

Constant 0.033 0.466* 0.033 0.466*(0.228) (0.248) (0.229) (0.249)

Observations 399 300 398 300

(5) Official budget forecasts are more optimistically biasedin countries subject to a budget deficit rule (SGP)

*** p<0.01, ** p<0.05, * p<0.1 Robust standard errors in parentheses, clustered by country.

33 countries

5 more econometric findings regarding bias toward optimism in official budget forecasts.

(6) The key macroeconomic input for budget forecasting in most countries: GDP. In Chile: the copper price.

(7) Real copper prices revert to trend in the long run.

But this is not always readily perceived: (8) 30 years of data are not enough

to reject a random walk statistically; 200 years of data are needed.

(9) Uncertainty (option-implied volatility) is higher when copper prices are toward the top of the cycle.

(10) Chile’s official forecasts are not overly optimistic.It has apparently avoided the problem of forecasts that unrealistically extrapolate in boom times.

In sum, institutions recommended to make fiscal policy less procyclical:

Official growth & budget forecasts tend toward wishful thinking : unrealistic extrapolation of booms 3 years into the future.

The bias is worse among the European countries supposedly subject to the budget rules of the SGP, presumably because government forecasters feel pressured

to announce they are on track to meet budget targets even if they are not.

Chile is not subject to the same bias toward over-optimism in forecasts of the budget, growth, or the all-important copper price.

The key innovation that has allowed Chile to achieve countercyclical fiscal policy: not just a structural budget rule in itself, but rather the regime that entrusts to two panels of experts

estimation of the long-run trends of copper prices & GDP.

Application to other countries Any country could adopt the Chilean mechanism,

not just commodity-exporters.

Suggestion: give the panels more institutional independence as is familiar from central banking:

requirements for professional qualifications of the members and laws protecting them from being fired.

Open questions: Are the budget rules to be interpreted as ex ante or ex post? How much of the structural budget calculations are

to be delegated to the independent panels of experts? Minimalist approach: they compute only 10-year moving averages.

Can one guard against subversion of the institutions (CBO) ?

References by the author Project Syndicate,,

““Escaping the Oil Curse,”  Dec.9, 2011.,”  Dec.9, 2011. ""Barrels, Bushels & Bonds: : How Commodity Exporters Can Hedge Volatility,"  ,"  Oct.17, 2011. Oct.17, 2011. 

““The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions,” ,” 2012, 2012, Commodity Price Volatility and Inclusive Growth in Low-Income CountriesCommodity Price Volatility and Inclusive Growth in Low-Income Countries , R.Arezki & Z.Min, , R.Arezki & Z.Min, eds.. HKS RWP12-014.  High Level Seminar, IMF Annual Meetings, DC, Sept.2011.eds.. HKS RWP12-014.  High Level Seminar, IMF Annual Meetings, DC, Sept.2011.

"The Curse: Why Natural Resources Are Not Always a Good Thing,”  "The Curse: Why Natural Resources Are Not Always a Good Thing,”  Milken Institute ReviewMilken Institute Review, vol.13, 4, vol.13, 4thth quarter 2011. quarter 2011.

““The Natural Resource Curse: A Survey,” 2012, The Natural Resource Curse: A Survey,” 2012, Chapter 2 in Chapter 2 in Beyond the Resource CurseBeyond the Resource Curse, , B.Shaffer & T. Ziyadov, eds. (U.Penn. Press); proofsB.Shaffer & T. Ziyadov, eds. (U.Penn. Press); proofs & & notes; Summary. notes; Summary.   CID WP195, 2011.

“How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?” Natural Resources, Finance & Development, R.Arezki, T.Gylfason & A.Sy, eds. (IMF), 2011.  HKS RWP 11-015.

“On Graduation from Procyclicality,” 2012, with C.Végh & G.Vuletin; J. Dev. Economics.

“Chile’s Solution to Fiscal Procyclicality,” 2012, Transitions blog, Foreign Policy.

“A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile,” in Fiscal Policy and Macroeconomic Performance, 2012.   Central Bank of Chile WP 604, 2011.

 "Product Price Targeting -- A New Improved Way of Inflation Targeting"Product Price Targeting -- A New Improved Way of Inflation Targeting ," in," in MAS MAS Monetary Review Monetary Review Vol.XI, issue 1, April 2012 (Monetary Authority of Singapore).Vol.XI, issue 1, April 2012 (Monetary Authority of Singapore).

“A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity-Exporters in Latin America," Economia, vol.11, 2011 (Brookings), NBER WP 16362.