Are Windfalls a Curse? A Non-Representative Agent Model of the Current Account and Fiscal Policy

44 Pages Posted: 24 Nov 2000 Last revised: 23 Sep 2010

See all articles by Aaron Tornell

Aaron Tornell

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Philip R. Lane

Trinity College (Dublin) - Department of Economics; Centre for Economic Policy Research (CEPR); Central Bank of Ireland

Date Written: August 1994

Abstract

In several countries temporary terms of trade improvements have led to a deterioration of the current account. Furthermore, many of these countries failed to attain greater post-boom growth rates. The point we make is that the structure of the fiscal process is critical in determining outcomes. If fiscal control is unitary, then the consumption-smoothing effect is operative, and representative-agent models of the current account have predictive power. However, if control is divided among several fiscal claimants, a voracity effect appears which counteracts the consumption-smoothing effect, leading to a deterioration of the current account in response to a positive shock. We model the interaction among fiscal claimants as a dynamic game, and show that in equilibrium aggregate appropriation increases more than the windfall itself. This results in a deterioration of the current account. We also show that all the windfall is dissipated, with the country experiencing no increase in its growth rate. Lastly, we analyze the experiences of seven countries which have enjoyed large windfalls.

Suggested Citation

Tornell, Aaron and Lane, Philip R., Are Windfalls a Curse? A Non-Representative Agent Model of the Current Account and Fiscal Policy (August 1994). NBER Working Paper No. w4839. Available at SSRN: https://ssrn.com/abstract=250357

Aaron Tornell (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Philip R. Lane

Trinity College (Dublin) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

Central Bank of Ireland ( email )

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Ireland

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