Is it really worse with a Bird in Hand? A comparison of fiscal rules for resource-rich economies
AbstractThis 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, Norwegian University of Science and Technology in its series Working Paper Series with number 12612.
Length: 22 pages
Date of creation: 02 Mar 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-21 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeffrey A. Frankel, 2010.
"The Natural Resource Curse: A Survey,"
NBER Working Papers
15836, National Bureau of Economic Research, Inc.
- 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.
- Rudolfs Bems & Irineu E. Carvalho Filho, 2009. "Current Account and Precautionary Savings for Exporters of Exhaustible Resources," IMF Working Papers 09/33, International Monetary Fund.
- Steven Barnett & Rolando Ossowski, 2002. "Operational Aspects of Fiscal Policy in Oil-Producing Countries," IMF Working Papers 02/177, International Monetary Fund.
- James D. Hamilton, 2009.
"Understanding Crude Oil Prices,"
The Energy Journal,
International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
- Rodrigo O. ValdÃ©s & Eduardo Engel, 2000.
"Optimal Fiscal Strategy for Oil Exporting Countries,"
IMF Working Papers
00/118, International Monetary Fund.
- 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.
- Pindyck, Robert S., 1998.
"The long-run evolution of energy prices,"
WP 4044-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Eyal Dvir & Ken Rogoff, 2009. "The Three Epochs of Oil," Boston College Working Papers in Economics 706, Boston College Department of Economics.
- Joel E. Cohen, 2010. "Beyond Population: Everyone Counts in Development," Working Papers 220, Center for Global Development.
- Caballero, Ricardo J., 1990.
"Consumption puzzles and precautionary savings,"
Journal of Monetary Economics,
Elsevier, vol. 25(1), pages 113-136, January.
- Daniel Leigh & Etibar Jafarov, 2007. "Alternative Fiscal Rules for Norway," IMF Working Papers 07/241, International Monetary Fund.
- Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
- Wojciech Maliszewski, 2009. "Fiscal Policy Rules for Oil-Producing Countries," IMF Working Papers 09/126, International Monetary Fund.
- Eyal Dvir & Kenneth S. Rogoff, 2009. "Three Epochs of Oil," NBER Working Papers 14927, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marit Balstad Jensen) The email address of this maintainer does not seem to be valid anymore. Please ask Marit Balstad Jensen to update the entry or send us the correct address.
If references are entirely missing, you can add them using this form.