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How Much is Enough? Monte Carlo Simulations of An Oil Stabilization Fund for Nigeria

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  • Ulrich Bartsch
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    Abstract

    In oil-dependent countries, a major issue is how to stabilize fiscal spending when government revenue fluctuates along with the international price of oil. A stabilization fund would allow the government to pull through an oil price trough and absorb windfall revenue when prices are high. This paper focuses on two key issues. First, the paper proposes to base government spending on moving averages of past oil prices that are shown to behave nearly as a random walk. Second, it uses Monte Carlo simulations of a fiscal policy model to look at the probability that a given level of assets in the stabilization fund is exhausted over a certain number of years. The simulations show that with a fiscal policy based on moving averages over three to five years, a stabilization fund of about 75 percent of 2004 oil revenue would be adequate, which, in Nigeria, would equate to US$16-18 billion.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/142.

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    Length: 19
    Date of creation: 01 Jun 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/142

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    Related research

    Keywords: Oil prices; Revenues; Government expenditures; fiscal policy; fiscal spending; government spending; government revenue; oil and gas; fiscal policy rule; stable fiscal policy; fiscal strategy; fiscal stabilization; opec; oil exports; international oil prices; oil companies; fiscal stance; government deficit; budget deficits; medium-term fiscal strategy; fiscal rule; fiscal stability; average oil price; fiscal vulnerability; fiscal deficits; oil production; oil price determination; government budget; adjustment of fiscal spending; fiscal responsibility; petroleum exporting countries; budget balance; natural resources; fiscal savings; government expenditure; organization of petroleum exporting countries; federal government budget; fiscal regimes; nonrenewable resources; regression model; petroleum corporation; oil market; gas resources;

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    1. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
    2. Rodrigo O. Valdés & Eduardo Engel, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," IMF Working Papers 00/118, International Monetary Fund.
    3. James Daniel, 2001. "Hedging Government Oil Price Risk," IMF Working Papers 01/185, International Monetary Fund.
    4. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
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    Cited by:
    1. Christian B. Mulder & Amadou N. R. Sy & Yinqiu Lu & Udaibir S. Das, 2009. "Setting Up a Sovereign Wealth Fund," IMF Working Papers 09/179, International Monetary Fund.
    2. Barrera, Carlos, 2010. "¿Respuesta asimétrica de precios domésticos de combustibles ante choques en el WTI?," Working Papers, Banco Central de Reserva del Perú 2010-016, Banco Central de Reserva del Perú.

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