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Domestic Petroleum Price Smoothing in Developing and Transition Countries

  • Benedict F. W. Bingham
  • James Daniel
  • Giulio Federico
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    This paper examines the case for government-led smoothing of domestic petroleum prices in the face of volatile international prices. Governments in most developing and transition countries engage in petroleum price smoothing, as the survey of country practice carried out for this paper shows. This paper reviews the potential welfare implications of petroleum price volatility, and assesses different price smoothing rules on the basis of historical oil prices. These simulations reveal the presence of a sharp trade-off between price smoothing and fiscal stability, suggesting that developing and transition country governments should engage in limited price smoothing and, if possible, rely on hedging instruments to do so.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/75.

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    Length: 28
    Date of creation: 01 May 2001
    Date of revision:
    Handle: RePEc:imf:imfwpa:01/75
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    1. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
    2. Massell, Benton F, 1969. "Price Stabilization and Welfare," The Quarterly Journal of Economics, MIT Press, vol. 83(2), pages 284-98, May.
    3. Turnovsky, Stephen J & Shalit, Haim & Schmitz, Andrew, 1980. "Consumer's Surplus, Price Instability, and Consumer Welfare," Econometrica, Econometric Society, vol. 48(1), pages 135-52, January.
    4. A. Mazaheri, 1999. "Convenience yield, mean reverting prices, and long memory in the petroleum market," Applied Financial Economics, Taylor & Francis Journals, vol. 9(1), pages 31-50.
    5. C. John McDermott & Paul Cashin & Alasdair Scott, 1999. "Booms and Slumps in World Commodity Prices," IMF Working Papers 99/155, International Monetary Fund.
    6. Leon, Javier & Soto, Raimundo, 1995. "Structural breaks and long-run trends in commodity prices," Policy Research Working Paper Series 1406, The World Bank.
    7. Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, vol. 82(1), pages 15-33, March.
    8. Paul Cashin & Hong Liang & C. John McDermott, 2000. "How Persistent Are Shocks to World Commodity Prices?," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 2.
    9. 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.
    10. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    11. Kletzer, Ken & Newbery, David M & Wright, Brian D, 1992. "Smoothing Primary Exporters' Price Risks: Bonds, Futures, Options and Insurance," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 641-71, October.
    12. Peter Wickham, 1996. "Volatility of Oil Prices," IMF Working Papers 96/82, International Monetary Fund.
    13. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
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