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Macroeconomic Uncertainties, Oil Subsidies, and Fiscal Sustainability in Asia

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  • Jha, Shikha

    (Asian Development Bank)

  • Quising, Pilipinas

    (Asian Development Bank)

  • Camingue, Shiela

    (Asian Development Bank)

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    Abstract

    Global oil prices have subsided relative to the peak reached in mid-2008, but compared to historical levels they remain elevated and volatile as economic uncertainties continue to unfold. The likelihood of these prices rising again soon cannot be ruled out. High oil prices can adversely affect growth, employment, external accounts, and fiscal positions of governments. An overwhelming response across Asia as international oil prices spiked in 2008 was to shield domestic consumers more than before through oil subsidies, which are inequitable, economically inefficient, and environmentally unfriendly. These subsidies add directly to the fiscal deficit and public debt, but are generally hidden, making their measurement difficult. Additionally, in combination with lower growth rates, higher spending to rev up demand across Asia is also worsening the fiscal positions of governments. This paper computes the transmission of recent global oil price movements to domestic markets and estimates oil price subsidies in a diverse group of 32 Asian economies. Using data for 18 of these countries and applying a forward-looking methodology for debt dynamics, the paper then examines the potential impact of responses to macroeconomic shocks and a possible rise in oil prices on public debt and estimates the fiscal correction needed to sustain debt at a steady-state level. Based on the findings from the empirical analysis, the paper extracts some guiding principles for fiscal policy responses to the economic shocks depending on country-specific circumstances.

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    Bibliographic Info

    Paper provided by Asian Development Bank in its series ADB Economics Working Paper Series with number 150.

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    Length: 36 pages
    Date of creation: Mar 2009
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    Handle: RePEc:ris:adbewp:0150

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    Related research

    Keywords: Oil subsidies; price pass through; macroeconomic uncertainty; stimulus packages; fiscal sustainability; public debt; Asia;

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    1. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
    2. Burnside, C. & Eichenbaum, M. & Rebelo, S., 1998. "Prospective Deficits and the Asian Currency Crisis," RCER Working Papers 458, University of Rochester - Center for Economic Research (RCER).
    3. International Monetary Fund, 2007. "Oil Shocks and External Balances," IMF Working Papers 07/110, International Monetary Fund.
    4. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, Elsevier, vol. 50(1), pages 185-213, February.
    5. Gian-Maria Milesi-Ferretti, 2000. "Good, Bad or Ugly?on the Effects of Fiscal Rules with Creative Accounting," IMF Working Papers 00/172, International Monetary Fund.
    6. Nina Budina & Sweder van Wijnbergen, 2008. "Quantitative Approaches to Fiscal Sustainability Analysis: A Case Study of Turkey since the Crisis of 2001," World Bank Economic Review, World Bank Group, World Bank Group, vol. 23(1), pages 119-140, November.
    7. Oya Celasun & Xavier Debrun & Jonathan D. Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 3.
    8. Oya Celasun & Xavier Debrun & Jonathan David Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries," IMF Working Papers 06/67, International Monetary Fund.
    9. Robert Gillingham & David Locke Newhouse & David Coady & Kangni Kpodar & Moataz El-Said & Paulo A. Medas, 2006. "The Magnitude and Distribution of Fuel Subsidies," IMF Working Papers 06/247, International Monetary Fund.
    10. Hostland, Doug & Karam, Philippe, 2006. "Assessing debt sustainability in emerging market economies using stochastic simulation methods," Policy Research Working Paper Series 3821, The World Bank.
    11. David Coady & Taimur Baig & Joseph Ntamatungiro & Amine Mati, 2007. "Domestic Petroleum Product Prices and Subsidies," IMF Working Papers 07/71, International Monetary Fund.
    12. Keane, Michael P & Prasad, Eswar S, 1996. "The Employment and Wage Effects of Oil Price Changes: A Sectoral Analysis," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 389-400, August.
    13. Davis, Steven J. & Haltiwanger, John, 2001. "Sectoral job creation and destruction responses to oil price changes," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(3), pages 465-512, December.
    14. Hana Polackova Brixi & Allen Schick, 2002. "Government at Risk : Contingent Liabilities and Fiscal Risk," World Bank Publications, The World Bank, number 15233, August.
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