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Is it really worse with a Bird in Hand? A comparison of fiscal rules for resource-rich economies

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  • Roberto Iacono

    ()
    (Department of Economics, Norwegian University of Science and Technology)

Abstract

This paper produces a normative evaluation of fiscal rules for a resource- rich small open economy. Ad-hoc fiscal rules might be sub-optimal and imply substantial welfare costs: the target is to analyze the magnitude of the costs by evaluating the relative welfare sub-optimality of these rules. I posit a closed-form solution for the infinite horizon maximization problem of the social planner of a small open economy with resource price uncertainty and precautionary saving. The model is subsequently calibrated to provide a welfare-based comparison between the fiscal rule based on the Permanent Income Hypothesis and the ad-hoc Bird in Hand rule. The result of the calibration indicates the presence of a positive absolute welfare gap and of an approximately null relative wealth loss from employing the Bird in Hand rule. This result is shown to be robust under different parameterizations. No, it is not that much worse with a Bird in Hand policy.

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Bibliographic Info

Paper provided by Department of Economics, Norwegian University of Science and Technology in its series Working Paper Series with number 12612.

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Length: 22 pages
Date of creation: 02 Mar 2012
Date of revision:
Handle: RePEc:nst:samfok:12612

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  1. Jeffrey A. Frankel, 2010. "The Natural Resource Curse: A Survey," NBER Working Papers 15836, National Bureau of Economic Research, Inc.
  2. Bems, Rudolfs & de Carvalho Filho, Irineu, 2011. "The current account and precautionary savings for exporters of exhaustible resources," Journal of International Economics, Elsevier, vol. 84(1), pages 48-64, May.
  3. Steven Barnett & Rolando Ossowski, 2002. "Operational Aspects of Fiscal Policy in Oil-Producing Countries," IMF Working Papers 02/177, International Monetary Fund.
  4. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
  5. Rodrigo O. Valdés & Eduardo Engel, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," IMF Working Papers 00/118, International Monetary Fund.
  6. Pindyck, Robert S., 1998. "The long-run evolution of energy prices," Working papers WP 4044-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Eyal Dvir & Ken Rogoff, 2009. "The Three Epochs of Oil," Boston College Working Papers in Economics 706, Boston College Department of Economics.
  8. Joel E. Cohen, 2010. "Beyond Population: Everyone Counts in Development," Working Papers 220, Center for Global Development.
  9. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
  10. Daniel Leigh & Etibar Jafarov, 2007. "Alternative Fiscal Rules for Norway," IMF Working Papers 07/241, International Monetary Fund.
  11. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
  12. Wojciech Maliszewski, 2009. "Fiscal Policy Rules for Oil-Producing Countries," IMF Working Papers 09/126, International Monetary Fund.
  13. Eyal Dvir & Kenneth S. Rogoff, 2009. "Three Epochs of Oil," NBER Working Papers 14927, National Bureau of Economic Research, Inc.
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