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Is it really worse with a Bird in Hand? A comparison of fiscal rules for resource-rich economies


  • Roberto Iacono

    () (Department of Economics, Norwegian University of Science and Technology)


This paper produces a normative evaluation of fiscal rules for a resource- rich small open economy. Ad-hoc fiscal rules might be sub-optimal and imply substantial welfare costs: the target is to analyze the magnitude of the costs by evaluating the relative welfare sub-optimality of these rules. I posit a closed-form solution for the infinite horizon maximization problem of the social planner of a small open economy with resource price uncertainty and precautionary saving. The model is subsequently calibrated to provide a welfare-based comparison between the fiscal rule based on the Permanent Income Hypothesis and the ad-hoc Bird in Hand rule. The result of the calibration indicates the presence of a positive absolute welfare gap and of an approximately null relative wealth loss from employing the Bird in Hand rule. This result is shown to be robust under different parameterizations. No, it is not that much worse with a Bird in Hand policy.

Suggested Citation

  • Roberto Iacono, 2012. "Is it really worse with a Bird in Hand? A comparison of fiscal rules for resource-rich economies," Working Paper Series 12612, Department of Economics, Norwegian University of Science and Technology.
  • Handle: RePEc:nst:samfok:12612

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    References listed on IDEAS

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    Cited by:

    1. Roberto Iacono, 2015. "The Basilicata Wealth Fund: Resource Policy and Long-run Economic Development in Southern Italy," Working Papers 2015.96, Fondazione Eni Enrico Mattei.

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    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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