Rethinking Fiscal Policy in Oil-Exporting Countries
42 Pages Posted: 14 Jun 2019
Date Written: May 2019
We examine the existing fiscal policy paradigm in commodity-exporting countries. First,we argue that its centerpiece-the permanent income hypothesis (PIH)-is not consistentwith either intergenerational equity or long-term sustainability in the presence ofuncertainty. Policies to achieve these goals need to be more prudent and better anchoredthan the PIH. Second, we point out the presence of a volatility tradeoff betweengovernment spending and wealth and re-assess long-held views on the appropriate fiscalanchors, the vice of procyclicality, and the (im)possibility of simultaneously smoothingconsumption and ensuring intergenerational equity and sustainability. Finally, we proposewhat we call a prudent wealth stabilization policy that would be more consistent withlong-term fiscal policy goals, yet relatively simple to implement and communicate.
Keywords: Consumption, Public investments, Poverty, Capital, Real interest rates, Fiscal policy, oil exporters, permanent income hypothesis, fiscal rules, PIH, intergenerational equity, long-term sustainability, oil price shock, non-stationary
JEL Classification: E62, H30, Q33, E01, G21, Q, Q02
Suggested Citation: Suggested Citation