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How Much Is Enough? Monte Carlo Simulations of an Oil Stabilization Fund for Nigeria

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  • Ulrich Bartsch

Abstract

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.

Suggested Citation

  • Ulrich Bartsch, 2006. "How Much Is Enough? Monte Carlo Simulations of an Oil Stabilization Fund for Nigeria," IMF Working Papers 06/142, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/142
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    References listed on IDEAS

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    1. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-1248, September.
    2. 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.
    3. Rodrigo O. Valdes & Eduardo M Engel, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," IMF Working Papers 00/118, International Monetary Fund.
    4. James Daniel, 2001. "Hedging Government Oil Price Risk," IMF Working Papers 01/185, International Monetary Fund.
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    Cited by:

    1. Christian B. Mulder & Amadou N Sy & Yinqiu Lu & Udaibir S Das, 2009. "Setting Up a Sovereign Wealth Fund; Some Policy and Operational Considerations," IMF Working Papers 09/179, International Monetary Fund.
    2. van den Bremer, Ton S. & van der Ploeg, Frederick, 2016. "Saving Alberta's resource revenues: Role of intergenerational and liquidity funds," Energy Policy, Elsevier, vol. 99(C), pages 132-146.
    3. Barrera, Carlos, 2010. "¿Respuesta asimétrica de precios domésticos de combustibles ante choques en el WTI?," Working Papers 2010-016, Banco Central de Reserva del Perú.

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