Dissou, YazidDevarajan, ShantayananRobinson, ShermanGo, Delfin S.2014-08-152014-08-152014-07https://hdl.handle.net/10986/19355This 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.en-USCC BY 3.0 IGOACCOUNTINGADJUSTMENT COSTADJUSTMENT COST FUNCTIONADJUSTMENT COST PARAMETERADJUSTMENT COSTSAFFILIATED ORGANIZATIONSAGGREGATE CONSUMPTIONARBITRAGEARBITRAGE CONDITIONASSETSBANK POLICYBENCHMARKBONDSBOOM-BUST CYCLEBUDGET CONSTRAINTBUDGET CONSTRAINTSBUSINESS CYCLECAPITAL ACCUMULATIONCAPITAL STOCKCASH TRANSFERSCENTRAL BANKCIRCULAR FLOWCIVIL WARCOMMODITYCOMMODITY PRICECONSUMER DEMANDCONSUMERSCONSUMPTION GOODCONSUMPTION PATHCONSUMPTION SMOOTHINGCONSUMPTION SPENDINGCRRACURRENCYCURRENT ACCOUNTCURRENT ACCOUNT BALANCECURRENT ACCOUNT DEFICITDEBTDEBT LEVELDEBT SUSTAINABILITYDECISION MAKINGDEPRECIATION RATEDEPRECIATION RATESDEVELOPING COUNTRIESDEVELOPING COUNTRYDEVELOPMENT POLICYDISCOUNT RATEDIVIDENDDIVIDEND INCOMEDIVIDENDSDOMESTIC CURRENCYDOMESTIC GOODDOMESTIC GOODSDOMESTIC INTEREST RATEDOMESTIC INVESTMENTDOMESTIC MARKETDUTCH DISEASEDYNAMIC ANALYSISECONOMETRIC ESTIMATEECONOMETRICSECONOMIC DEVELOPMENTECONOMIC GROWTHECONOMIC IMPLICATIONSECONOMIC STATISTICSELASTICITYELASTICITY OF OUTPUTELASTICITY OF SUBSTITUTIONEQUILIBRIUMEQUILIBRIUM CONDITIONSEQUILIBRIUM VALUEEXOGENOUS RATEEXPECTED VALUEEXPENDITUREEXPORT GOODEXPORT GOODSEXPORT REVENUEEXPORT SECTOREXPORT VOLUMEEXPORTEREXPORTERSEXPORTSEXTERNAL SHOCKSEXTERNALITYFINANCIAL ASSETSFIXED SHAREFOREIGN ASSETSFOREIGN CURRENCYFOREIGN DEBTFUNCTIONAL FORMSFUTURE GROWTHFUTURE RESEARCHGDPGENERAL EQUILIBRIUMGENERAL EQUILIBRIUM ANALYSISGENERAL EQUILIBRIUM MODELGOOD GOVERNANCEGOVERNMENT BUDGETGOVERNMENT DEBTGOVERNMENT EXPENDITURESGOVERNMENT INVESTMENTGOVERNMENT POLICYGOVERNMENT REVENUEGOVERNMENT SPENDINGGROWTH RATEHOUSEHOLD INCOMEHOUSEHOLD WEALTHHUMAN CAPITALHUMAN DEVELOPMENTIMPORTIMPORT TARIFFIMPORTSINCOMEINCOME SHOCKSINCOME TAXINCOME TAXESINDEBTEDNESSINEFFICIENCYINSURANCEINTEREST INCOMEINTEREST INCOMESINTEREST RATEINTEREST RATESINTERNATIONAL BANKINTERNATIONAL ECONOMICSINTERNATIONAL MARKETINTERNATIONAL TRADEINVESTINGINVESTMENT DECISIONSINVESTMENT DEMANDINVESTMENT DEMANDSINVESTMENT EXPENDITURESINVESTMENT FUNCTIONINVESTMENT GOODSLABOR MARKETLEVEL OF INVESTMENTLEVIESLIQUID ASSETSLIQUIDITYLIQUIDITY CONSTRAINTSLOW-INCOME COUNTRIESLOW-INCOME COUNTRYMACROECONOMIC MODELSMACROECONOMIC VARIABLESMACROECONOMICSMARGINAL COSTMARGINAL PRODUCTMARGINAL PRODUCTIVITYMARKET PRICESMAXIMUM LIKELIHOOD ESTIMATIONMONETARY FUNDMONETARY POLICYMONETARY UNIONNATURAL RESOURCENATURAL RESOURCESNEGATIVE SHOCKNOMINAL EXCHANGE RATEOIL REVENUEOIL REVENUESOPEN ECONOMIESOPEN ECONOMYOPTIMAL ALLOCATIONOPTIMIZATIONPERMANENT INCOMEPERMANENT INCOME HYPOTHESISPIHPOLICY RESPONSESPORTFOLIOPOSITIVE EFFECTSPRICE CHANGEPRICE CHANGESPRICE DECLINESPRICE FLUCTUATIONSPRICE INCREASEPRICE INCREASESPRICE UNCERTAINTYPRICE VOLATILITYPRIVATE CAPITALPRIVATE CAPITAL STOCKPRIVATE CONSUMPTIONPRIVATE DEBTPRIVATE INVESTMENTPRODUCTION FUNCTIONPRODUCTIVITYPUBLIC INVESTMENTRATE OF DEPRECIATIONRATE OF GROWTHRATE OF RETURNREAL EXCHANGE RATEREAL INTERESTREAL INTEREST RATERELATIVE PRICERELATIVE PRICESREMITTANCESRESERVESRETURNSRISK AVERSIONSAVINGSSMALL ECONOMYSOCIAL VALUESOURCE OF UNCERTAINTYSTANDARD DEVIATIONSTEADY STATESTEADY STATE LEVELSTEADY STATE LEVELSTAX RATETAX RATESTOTAL EXPORTSTOTAL FACTOR PRODUCTIVITYTOTAL INVESTMENTTRADABLE GOODTRADE DEFICITTRADE POLICYTRADE SHOCKTRADE SHOCKSTRANSMISSION MECHANISMSUTILITY FUNCTIONVALUE OF OUTPUTVOLATILITIESWAGESWEALTHWEIGHTSWITHDRAWALWORLD FINANCIAL MARKETWORLD INTEREST RATEWORLD PRICEWORLD PRICES10.1596/1813-9450-6984