The long–run macroeconomic impacts of fuel subsidies
Many developing and emerging market countries have subsidies on fuel products. Using a small open economy model with a non-traded sector I show how these subsidies impact the steady state levels of macroeconomic aggregates such as consumption, labor supply, and aggregate welfare. These subsidies can lead to crowding out of non-oil consumption, inefficient inter-sectoral allocations of labor, and other distortions in macroeconomic variables. Across steady states aggregate welfare is reduced by these subsidies. This result holds for a country with no oil production and for a net exporter of oil. The distortions in relative prices introduced by the subsidy create most of the welfare losses. How the subsidy is financed is of secondary importance. Aggregate welfare is significantly higher if the subsidies are replaced by lump-sum transfers of equal value.
|Date of creation:||2013|
|Date of revision:|
|Note:||Published as: Plante, Michael (2014), "The Long–run Macroeconomic Impacts of Fuel Subsidies," Journal of Development Economics 107: 129-143.|
|Contact details of provider:|| Web page: http://www.dallasfed.org/|
More information through EDIRC
|Order Information:|| Email: |
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.:
- Robert Gillingham & David Locke Newhouse & David Coady & Kangni Kpodar & Moataz El-Said & Paulo A. Medas, 2006.
"The Magnitude and Distribution of Fuel Subsidies; Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka,"
IMF Working Papers
06/247, International Monetary Fund.
- Kangni Kpodar & David Coady & Moataz El-Said & Robert Gillingham & Paulo Medas & David Newhouse, 2006. "The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka," Post-Print hal-00130176, HAL.
- Ihrig, Jane & Moe, Karine S., 2004. "Lurking in the shadows: the informal sector and government policy," Journal of Development Economics, Elsevier, vol. 73(2), pages 541-557, April.
- Anand, Rahul & Prasad, Eswar, 2010.
"Optimal Price Indices for Targeting Inflation under Incomplete Markets,"
IZA Discussion Papers
5137, Institute for the Study of Labor (IZA).
- Rahul Anand & Eswar S. Prasad, 2010. "Optimal Price Indices for Targeting Inflation Under Incomplete Markets," NBER Working Papers 16290, National Bureau of Economic Research, Inc.
- Rahul Anand & Eswar Prasad, 2010. "Optimal Price Indices for Targeting Inflation Under Incomplete Markets," IMF Working Papers 10/200, International Monetary Fund.
- Roberto Chang & Luis CatÃ£o, 2010.
"World Food Prices and Monetary Policy,"
IMF Working Papers
10/161, International Monetary Fund.
- Daniel J. Graham & Stephen Glaister, 2002. "The Demand for Automobile Fuel: A Survey of Elasticities," Journal of Transport Economics and Policy, University of Bath, vol. 36(1), pages 1-25, January.
- John M. Piotrowski & David Coady & Justin Tyson & Rolando Ossowski & Robert Gillingham & Shamsuddin Tareq, 2010. "Petroleum Product Subsidies; Costly, Inequitable, and On the Rise," IMF Staff Position Notes 2010/05, International Monetary Fund.
- Aleh Tsyvinski & Martin Petri & GÃ¼nther Taube, 2002. "Energy Sector Quasi-Fiscal Activities in the Countries of the Former Soviet Union," IMF Working Papers 02/60, International Monetary Fund.
- Kangni Kpodar, 2006. "Distributional Effects of Oil Price Changeson Household Expenditures; Evidence From Mali," IMF Working Papers 06/91, International Monetary Fund.
- Christopher Adam, 2006.
"Riding the Wave: Monetary Responses to Aid Surges in Low-Income Countries,"
Economics Series Working Papers
WPS/2006-04, University of Oxford, Department of Economics.
- Buffie, Edward & Adam, Christopher & O'Connell, Stephen & Pattillo, Catherine, 2008. "Riding the wave: Monetary responses to aid surges in low-income countries," European Economic Review, Elsevier, vol. 52(8), pages 1378-1395, November.
- Edward Buffie & Christopher Adam & Stephen O'Connell & Catherine Patillo, 2006. "Riding the Wave: Monetary Responses to Aid Surges in Low-Income Countries," CSAE Working Paper Series 2006-04, Centre for the Study of African Economies, University of Oxford.
- Pritha Mitra & Ruben Atoyan, 2012. "Ukraine Gas Pricing Policy; Distributional Consequences of Tariff Increases," IMF Working Papers 12/247, International Monetary Fund.
- Nooman Rebei & Mohamed Safouane Ben Aissa, 2012.
"Price Subsidies and the Conduct of Monetary Policy,"
IMF Working Papers
12/15, International Monetary Fund.
- Ben Aïssa, Mohamed Safouane & Rebei, Nooman, 2012. "Price subsidies and the conduct of monetary policy," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 769-787.
- David Coady & Taimur Baig & Joseph Ntamatungiro & Amine Mati, 2007. "Domestic Petroleum Product Prices and Subsidies; Recent Developments and Reform Strategies," IMF Working Papers 07/71, International Monetary Fund.
- Larsen, Bjorn & Shah, Anwar & DEC, 1992. "World fossil fuel subsidies and global carbon emissions," Policy Research Working Paper Series 1002, The World Bank.
- Felix Reichling & Charles Whalen, 2012. "Review of Estimates of the Frisch Elasticity of Labor Supply: Working Paper 2012-13," Working Papers 43676, Congressional Budget Office.
When requesting a correction, please mention this item's handle: RePEc:fip:feddwp:1303. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Chapman)
If references are entirely missing, you can add them using this form.