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Optimal Spending and Saving Strategies for Commodity-Rich Countries

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  • Alvaro Aguirre

Abstract

This paper builds a quantitative model to assess the optimal allocation of resources in an economy that is subject to a volatile source of income such as commodity exports, and with imperfect access to international financial markets. In this context the government faces a trade-off between smoothing expenditures and accumulating assets for precautionary motives, as well as saving in riskfree assets and investing in physical capital. The features of the model and the solution method allow for a detailed exploration of the trade-offs involved, particularly those related to volatility and uncertainty. The analysis sheds light about optimal saving and spending in stochastic environments, and best responses to large shocks and to permanent changes in stochastic processes.

Suggested Citation

  • Alvaro Aguirre, 2021. "Optimal Spending and Saving Strategies for Commodity-Rich Countries," Working Papers Central Bank of Chile 909, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:909
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_909.pdf
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    References listed on IDEAS

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    1. Cherif, Reda & Hasanov, Fuad, 2013. "Oil Exporters’ Dilemma: How Much to Save and How Much to Invest," World Development, Elsevier, vol. 52(C), pages 120-131.
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    3. Mr. Rodrigo O. Valdes & Mr. Eduardo E Engel, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," IMF Working Papers 2000/118, International Monetary Fund.
    4. Hansen, James & Gross, Isaac, 2018. "Commodity price volatility with endogenous natural resources," European Economic Review, Elsevier, vol. 101(C), pages 157-180.
    5. César Calderón & Enrique Moral‐Benito & Luis Servén, 2015. "Is infrastructure capital productive? A dynamic heterogeneous approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(2), pages 177-198, March.
    6. Andrew Berg & Rafael Portillo & Shu-Chun S Yang & Luis-Felipe Zanna, 2013. "Public Investment in Resource-Abundant Developing Countries," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(1), pages 92-129, April.
    7. Paul Collier & Rick Van Der Ploeg & Michael Spence & Anthony J Venables, 2010. "Managing Resource Revenues in Developing Economies," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 84-118, April.
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