Fossil Fuel Prices and the Economic and Budgetary Challenges of a Small Energy-Importing Economy: The Case of Portugal
AbstractThis paper examines the economic and budgetary impacts of fuel prices using a dynamic general equilibrium model of the Portuguese economy which highlights the mechanisms of endogenous growth and includes a detailed modeling of the public sector. The fuel price scenarios are based on forecasts by the US Department of Energy (DOE-US) and the International Energy Agency (IEA-OECD) and represent a wide range of projections for absolute and relative fossil fuel prices. In terms of the long term economic impact, our results suggest a 1.9 percent drop in GDP in the DOE-US scenario and 1.6 percent in the IEA-OECD scenario. As to the budgetary impact, higher fuel prices lead to lower tax revenues, which, coupled with a reduction in public spending, translate into lower public deficits. Accordingly, increasing fuel prices create an important policy trade off in that they can contribute to reducing the public deficit while hindering economic growth. We find that fairly strong incentives for wind energy can reduce the economic impact of fuel prices by 14.2 percent in the DOE-US price scenario and 18.5 percent reduction in the IEA-OECD price scenario. Finally, our results highlight the importance of public sector spending decisions and the mechanisms of endogenous growth in understanding the impact of fossil fuel prices. Indeed, a scenario of higher fuel prices would, with exogenous public decisions and exogenous economic growth assumptions, result in substantially smaller economic effects and yield adverse budgetary effects.
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Bibliographic InfoPaper provided by Department of Economics, College of William and Mary in its series Working Papers with number 115.
Length: 47 pages
Date of creation: 19 Oct 2012
Date of revision:
Fuel Prices; Economic Performance; Budgetary Consolidation; Dynamic General Equilibrium; Endogenous Growth; Portugal.;
Find related papers by JEL classification:
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
- O52 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Europe
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
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