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How Much is Enough? Monte Carlo Simulations of An Oil Stabilization Fund for Nigeria

  • Ulrich Bartsch
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    In oil-dependent countries, a major issue is how to stabilize fiscal spending when government revenue fluctuates along with the international price of oil. A stabilization fund would allow the government to pull through an oil price trough and absorb windfall revenue when prices are high. This paper focuses on two key issues. First, the paper proposes to base government spending on moving averages of past oil prices that are shown to behave nearly as a random walk. Second, it uses Monte Carlo simulations of a fiscal policy model to look at the probability that a given level of assets in the stabilization fund is exhausted over a certain number of years. The simulations show that with a fiscal policy based on moving averages over three to five years, a stabilization fund of about 75 percent of 2004 oil revenue would be adequate, which, in Nigeria, would equate to US$16-18 billion.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/142.

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    Length: 19
    Date of creation: 01 Jun 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/142
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    1. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
    2. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
    3. repec:imf:imfwpa:00/118 is not listed on IDEAS
    4. James Daniel, 2001. "Hedging Government Oil Price Risk," IMF Working Papers 01/185, International Monetary Fund.
    5. 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.
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