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Budget Rules and Resource Booms and Busts: A Dynamic Stochastic General Equilibrium Analysis

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  • Sherman Robinson
  • Shantayanan Devarajan , Yazid Dissou , Delfin S. Go

Abstract

We develop a DSGE model to analyze and derive simple budget rules in the face of volatile public revenue from natural resources in a low-income country. We simulate the impact of resource windfalls and policy responses in a model that captures both the implications of current decisions on future growth and welfare, and the uncertainty that is intrinsic to resource prices. We ask: What rules-of-thumb does dynamic stochastic general equilibrium (DSGE) analysis provide about budgetary spending of uncertain and fluctuating resource windfalls, especially in low-income and newly resource rich developing?Our simulation results suggest three policy lessons or rules of thumb. (1) When a resource price change is positive and temporary, the best strategy is to save the revenue windfall in a sovereign fund, and use the interest income from the fund to raise citizens’ consumption over time. This strategy is preferred to investing in public capital domestically, even when private investment benefits from an enhanced public capital stock. (2) In the presence of a negative temporary resource price change however, the best strategy is to cut public investment. (3) In the presence of persistent (positive and negative) shocks, the best strategy is to combine both public investment and saving abroad in a balanced regime that provides a natural insurance against both types of price shocks.

Suggested Citation

  • Sherman Robinson & Shantayanan Devarajan , Yazid Dissou , Delfin S. Go, 2015. "Budget Rules and Resource Booms and Busts: A Dynamic Stochastic General Equilibrium Analysis," EcoMod2015 8420, EcoMod.
  • Handle: RePEc:ekd:008007:8420
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    References listed on IDEAS

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    Cited by:

    1. Montaud, Jean-Marc & Pecastaing, Nicolas & Tankari, Mahamadou, 2017. "Potential socio-economic implications of future climate change and variability for Nigerien agriculture: A countrywide dynamic CGE-Microsimulation analysis," Economic Modelling, Elsevier, vol. 63(C), pages 128-142.
    2. Mendez Ramos,Fabian, 2019. "Uncertainty in Ex-Ante Poverty and Income Distribution : Insights from Output Growth and Natural Resource Country Typologies," Policy Research Working Paper Series 8841, The World Bank.

    More about this item

    Keywords

    Niger; Optimization models; General equilibrium modeling;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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