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Domestic Petroleum Price Smoothing in Developing and Transition Countries

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  • Benedict F. W. Bingham
  • James Daniel
  • Giulio Federico
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    Abstract

    This paper examines the case for government-led smoothing of domestic petroleum prices in the face of volatile international prices. Governments in most developing and transition countries engage in petroleum price smoothing, as the survey of country practice carried out for this paper shows. This paper reviews the potential welfare implications of petroleum price volatility, and assesses different price smoothing rules on the basis of historical oil prices. These simulations reveal the presence of a sharp trade-off between price smoothing and fiscal stability, suggesting that developing and transition country governments should engage in limited price smoothing and, if possible, rely on hedging instruments to do so.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/75.

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    Length: 28
    Date of creation: 01 May 2001
    Date of revision:
    Handle: RePEc:imf:imfwpa:01/75

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    Related research

    Keywords: Oil prices; Price stabilization;

    References

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    1. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
    2. A. Mazaheri, 1999. "Convenience yield, mean reverting prices, and long memory in the petroleum market," Applied Financial Economics, Taylor & Francis Journals, vol. 9(1), pages 31-50.
    3. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    4. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
    5. Paul Cashin & Hong Liang & C. John McDermott, 2000. "How Persistent Are Shocks to World Commodity Prices?," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 2.
    6. Kletzer, Ken & Newbery, David M & Wright, Brian D, 1992. "Smoothing Primary Exporters' Price Risks: Bonds, Futures, Options and Insurance," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 641-71, October.
    7. Eduardo M.R.A. Engel & Rodrigo Valdés, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," Documentos de Trabajo 78, Centro de Economía Aplicada, Universidad de Chile.
    8. Cashin, Paul & McDermott, C. John & Scott, Alasdair, 2002. "Booms and slumps in world commodity prices," Journal of Development Economics, Elsevier, vol. 69(1), pages 277-296, October.
    9. Turnovsky, Stephen J & Shalit, Haim & Schmitz, Andrew, 1980. "Consumer's Surplus, Price Instability, and Consumer Welfare," Econometrica, Econometric Society, vol. 48(1), pages 135-52, January.
    10. Massell, Benton F, 1969. "Price Stabilization and Welfare," The Quarterly Journal of Economics, MIT Press, vol. 83(2), pages 284-98, May.
    11. Javier Le�N & Raimundo Soto, 1997. "Structural Breaks And Long-Run Trends In Commodity Prices," Journal of International Development, John Wiley & Sons, Ltd., vol. 9(3), pages 347-366.
    12. Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, vol. 82(1), pages 15-33, March.
    13. Peter Wickham, 1996. "Volatility of Oil Prices," IMF Working Papers 96/82, International Monetary Fund.
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    Citations

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    Cited by:
    1. Daniel Artana & Fernando Navajas & Marcelo Catena, 2007. "El Shock de los Precios del Petróleo en América Central: Implicancias Fiscales y Energéticas," Research Department Publications 4556, Inter-American Development Bank, Research Department.
    2. José Gallardo & Arturo Vásquez & Luis Bendezú, 2005. "La Problemática de los Precios de los Combustibles," Working Papers 11, OSINERGMIN, Oficina de Estudios Economicos.
    3. David Coady & Javier Arze del Granado, 2010. "The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries," IMF Working Papers 10/202, International Monetary Fund.
    4. David Coady & Taimur Baig & Joseph Ntamatungiro & Amine Mati, 2007. "Domestic Petroleum Product Prices and Subsidies: Recent Developments and Reform Strategies," IMF Working Papers 07/71, International Monetary Fund.
    5. Hafedh Bouakez & Nooman Rebei & Désiré Vencatachellum, 2008. "Optimal Pass-Through of Oil Prices in an Economy with Nominal Rigidities," Cahiers de recherche 0831, CIRPEE.
    6. Paterson, Anna, 2005. "Understanding Markets in Afghanistan: A Study of the Market for Petroleum Fuels," Case Studies 14634, Afghanistan Research and Evaluation Unit.

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