Commodity stabilization funds are hard-currency savings to protect against a fall in income for commodity exports in the presence of borrowing constraints. The authors develop the optimal rules for deposits in and withdrawals from such a fund by using a benchmark model of precautionary savings with liquidity constraints. They show that the optimal stabilization fund is small. For the Chilean Copper Stabilization fund, they show that the actual accumulation of foreign assets has been much larger than the benchmark model requires. Over long periods, the copper fund should contain less than one month's exports. They also use the model to find the optimal depletion of the windfall gain oil exports received as a result of the Persian Gulf crisis - amounting to about four months of average exports. They find that such a windfall gain should be depleted in about four years. In the long run, an oil exporter should keep a small fund, significantly less than one month of oilexports. But higher-than-predicted funds can be justified if there are externalities associated with the fund, frictions in the economy, or the borrowing constraint is relaxed.
