Optimal Fiscal Strategy for Oil Exporting Countries

71 Pages Posted: 1 Feb 2006

See all articles by Eduardo M. R. A. Engel

Eduardo M. R. A. Engel

Yale University - Department of Economics; National Bureau of Economic Research (NBER)

Rodrigo Valdés

Central Bank of Chile; Ministry of Finance, Chile

Date Written: June 2000

Abstract

This paper develops simple guidelines for fiscal policy in oil producing countries, focusing on three issues: intergenerational oil distribution, precautionary saving, and adjustment costs. The paper presents a framework to analyze how the revenue generated by an exhaustible source of wealth that belongs to the government should be distributed between current and future generations. This framework is used to show the strengths and limitations of existing answers, which motivates a new approach for dealing with this question. The paper derives simple, closed form approximations to the optimal level of government expenditure when an important part of government revenue is generated by an uncertain and exhaustible natural resource such as oil. Price uncertainty, budget uncertainty, and the (possibly asymmetric) costs of adjusting expenditure levels are considered.

Keywords: Fiscal Policy, oil exporting countries, stabilization funds

JEL Classification: E62, H62, H63

Suggested Citation

Engel, Eduardo M. and Valdés, Rodrigo O., Optimal Fiscal Strategy for Oil Exporting Countries (June 2000). IMF Working Paper No. 00/118, Available at SSRN: https://ssrn.com/abstract=879864

Eduardo M. Engel (Contact Author)

Yale University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Rodrigo O. Valdés

Central Bank of Chile ( email )

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Chile
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+56 2 670 2231 (Fax)

Ministry of Finance, Chile

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Santiago, 8340487
Chile

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