Publication: Budget Rules and Resource Booms : A Dynamic Stochastic General Equilibrium Analysis
Date
2014-07
ISSN
Published
2014-07
Author(s)
Abstract
This paper develops a dynamic stochastic
general equilibrium model to analyze and derive simple
budget rules in the face of volatile public revenue from
natural resources in a low-income country like Niger. The
simulation results suggest three policy lessons or rules of
thumb. When a resource price change is positive and
temporary, the best strategy is to save the revenue windfall
in a sovereign fund, and use the interest income from the
fund to raise citizens' consumption over time. This
strategy is preferred to investing in public capital
domestically, even when private investment benefits from an
enhanced public capital stock. Domestic investment raises
the prices of domestic goods, leaving less money for
government to transfer to households; public investment is
not 100 percent effective in raising output. In the presence
of a negative temporary resource price change, however, the
best strategy is to cut public investment. This strategy
dominates other methods, such as trimming government
transfers to households, which reduces consumption directly,
or borrowing, which incurs an interest premium as debt
rises. In the presence of persistent (positive and negative)
shocks, the best strategy is a mix of public investment and
saving abroad in a balanced regime that provides a natural
insurance against both types of price shocks. The
combination of interest income from the sovereign fund,
transfers to households, and output growth brought about by
public investment provides the best protective mechanism to
smooth consumption over time in response to changing
resource prices.
Link to Data Set
Citation
“Devarajan, Shantayanan; Dissou, Yazid; Go, Delfin S.; Robinson, Sherman. 2014. Budget Rules and Resource Booms : A Dynamic Stochastic General Equilibrium Analysis. Policy Research Working Paper;No. 6984. © World Bank Group, Washington, DC. http://hdl.handle.net/10986/19355 License: CC BY 3.0 IGO.”
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