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The long–run macroeconomic impacts of fuel subsidies

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  • Plante, Michael D.

    () (Federal Reserve Bank of Dallas)

Abstract

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.

Suggested Citation

  • Plante, Michael D., 2013. "The long–run macroeconomic impacts of fuel subsidies," Working Papers 1303, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddwp:1303 DOI: 10.24149/wp1303 Note: Published as: Plante, Michael (2014), "The Long–run Macroeconomic Impacts of Fuel Subsidies," Journal of Development Economics 107: 129-143.
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gerhard Glomm & Juergen Jung, 2015. "A Macroeconomic Analysis Of Energy Subsidies In A Small Open Economy," Economic Inquiry, Western Economic Association International, vol. 53(4), pages 1783-1806, October.
    2. repec:eee:eneeco:v:67:y:2017:i:c:p:242-254 is not listed on IDEAS
    3. Nathan S. Balke, Michael Plante, and Mine Yücel, 2015. "Fuel Subsidies, the Oil Market and the World Economy," The Energy Journal, International Association for Energy Economics, vol. 0(Adelman S).
    4. Gabriel Di Bella & Lawrence Norton & Joseph Ntamatungiro & Sumiko Ogawa & Issouf Samaké & Marika Santoro, 2015. "Energy Subsidies in Latin America and the Caribbean; Stocktaking and Policy Challenges," IMF Working Papers 15/30, International Monetary Fund.
    5. Jun E Rentschler & Nobuhiro Hosoe, 2017. "Illicit dealings: Fossil fuel subsidy reforms and the role of tax evasion and smuggling," GRIPS Discussion Papers 17-05, National Graduate Institute for Policy Studies.
    6. repec:oup:renvpo:v:11:y:2017:i:1:p:138-155. is not listed on IDEAS
    7. Hancevic, Pedro & Cont, Walter & Navajas, Fernando, 2016. "Energy populism and household welfare," Energy Economics, Elsevier, vol. 56(C), pages 464-474.
    8. Jiang, Zhujun & Ouyang, Xiaoling & Huang, Guangxiao, 2015. "The distributional impacts of removing energy subsidies in China," China Economic Review, Elsevier, vol. 33(C), pages 111-122.
    9. repec:spr:ieaple:v:17:y:2017:i:3:d:10.1007_s10784-017-9358-9 is not listed on IDEAS
    10. Arzaghi, Mohammad & Squalli, Jay, 2015. "How price inelastic is demand for gasoline in fuel-subsidizing economies?," Energy Economics, Elsevier, vol. 50(C), pages 117-124.
    11. Scobie, Michelle, 2017. "Fossil fuel reform in developing states: The case of Trinidad and Tobago, a petroleum producing small Island developing State," Energy Policy, Elsevier, vol. 104(C), pages 265-273.
    12. Bentour, El Mostafa, 2015. "On the removal of energy products subsidies in an importing oil country: impacts on prices in Morocco," MPRA Paper 63635, University Library of Munich, Germany.

    More about this item

    Keywords

    Fiscal; policy;

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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