Budget Rules and Resource Booms : A Dynamic Stochastic General Equilibrium Analysis

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 poli...

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Bibliographic Details
Main Authors:	Devarajan, Shantayanan, Dissou, Yazid, Go, Delfin S., Robinson, Sherman
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank Group, Washington, DC 2014
Subjects:	ACCOUNTING ADJUSTMENT COST ADJUSTMENT COST FUNCTION ADJUSTMENT COST PARAMETER ADJUSTMENT COSTS AFFILIATED ORGANIZATIONS AGGREGATE CONSUMPTION ARBITRAGE ARBITRAGE CONDITION ASSETS BANK POLICY BENCHMARK BONDS BOOM-BUST CYCLE BUDGET CONSTRAINT BUDGET CONSTRAINTS BUSINESS CYCLE CAPITAL ACCUMULATION CAPITAL STOCK CASH TRANSFERS CENTRAL BANK CIRCULAR FLOW CIVIL WAR COMMODITY COMMODITY PRICE CONSUMER DEMAND CONSUMERS CONSUMPTION GOOD CONSUMPTION PATH CONSUMPTION SMOOTHING CONSUMPTION SPENDING CRRA CURRENCY CURRENT ACCOUNT CURRENT ACCOUNT BALANCE CURRENT ACCOUNT DEFICIT DEBT DEBT LEVEL DEBT SUSTAINABILITY DECISION MAKING DEPRECIATION RATE DEPRECIATION RATES DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT POLICY DISCOUNT RATE DIVIDEND DIVIDEND INCOME DIVIDENDS DOMESTIC CURRENCY DOMESTIC GOOD DOMESTIC GOODS DOMESTIC INTEREST RATE DOMESTIC INVESTMENT DOMESTIC MARKET DUTCH DISEASE DYNAMIC ANALYSIS ECONOMETRIC ESTIMATE ECONOMETRICS ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC IMPLICATIONS ECONOMIC STATISTICS ELASTICITY ELASTICITY OF OUTPUT ELASTICITY OF SUBSTITUTION EQUILIBRIUM EQUILIBRIUM CONDITIONS EQUILIBRIUM VALUE EXOGENOUS RATE EXPECTED VALUE EXPENDITURE EXPORT GOOD EXPORT GOODS EXPORT REVENUE EXPORT SECTOR EXPORT VOLUME EXPORTER EXPORTERS EXPORTS EXTERNAL SHOCKS EXTERNALITY FINANCIAL ASSETS FIXED SHARE FOREIGN ASSETS FOREIGN CURRENCY FOREIGN DEBT FUNCTIONAL FORMS FUTURE GROWTH FUTURE RESEARCH GDP GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM ANALYSIS GENERAL EQUILIBRIUM MODEL GOOD GOVERNANCE GOVERNMENT BUDGET GOVERNMENT DEBT GOVERNMENT EXPENDITURES GOVERNMENT INVESTMENT GOVERNMENT POLICY GOVERNMENT REVENUE GOVERNMENT SPENDING GROWTH RATE HOUSEHOLD INCOME HOUSEHOLD WEALTH HUMAN CAPITAL HUMAN DEVELOPMENT IMPORT IMPORT TARIFF IMPORTS INCOME INCOME SHOCKS INCOME TAX INCOME TAXES INDEBTEDNESS INEFFICIENCY INSURANCE INTEREST INCOME INTEREST INCOMES INTEREST RATE INTEREST RATES INTERNATIONAL BANK INTERNATIONAL ECONOMICS INTERNATIONAL MARKET INTERNATIONAL TRADE INVESTING INVESTMENT DECISIONS INVESTMENT DEMAND INVESTMENT DEMANDS INVESTMENT EXPENDITURES INVESTMENT FUNCTION INVESTMENT GOODS LABOR MARKET LEVEL OF INVESTMENT LEVIES LIQUID ASSETS LIQUIDITY LIQUIDITY CONSTRAINTS LOW-INCOME COUNTRIES LOW-INCOME COUNTRY MACROECONOMIC MODELS MACROECONOMIC VARIABLES MACROECONOMICS MARGINAL COST MARGINAL PRODUCT MARGINAL PRODUCTIVITY MARKET PRICES MAXIMUM LIKELIHOOD ESTIMATION MONETARY FUND MONETARY POLICY MONETARY UNION NATURAL RESOURCE NATURAL RESOURCES NEGATIVE SHOCK NOMINAL EXCHANGE RATE OIL REVENUE OIL REVENUES OPEN ECONOMIES OPEN ECONOMY OPTIMAL ALLOCATION OPTIMIZATION PERMANENT INCOME PERMANENT INCOME HYPOTHESIS PIH POLICY RESPONSES PORTFOLIO POSITIVE EFFECTS PRICE CHANGE PRICE CHANGES PRICE DECLINES PRICE FLUCTUATIONS PRICE INCREASE PRICE INCREASES PRICE UNCERTAINTY PRICE VOLATILITY PRIVATE CAPITAL PRIVATE CAPITAL STOCK PRIVATE CONSUMPTION PRIVATE DEBT PRIVATE INVESTMENT PRODUCTION FUNCTION PRODUCTIVITY PUBLIC INVESTMENT RATE OF DEPRECIATION RATE OF GROWTH RATE OF RETURN REAL EXCHANGE RATE REAL INTEREST REAL INTEREST RATE RELATIVE PRICE RELATIVE PRICES REMITTANCES RESERVES RETURNS RISK AVERSION SAVINGS SMALL ECONOMY SOCIAL VALUE SOURCE OF UNCERTAINTY STANDARD DEVIATION STEADY STATE STEADY STATE LEVEL STEADY STATE LEVELS TAX RATE TAX RATES TOTAL EXPORTS TOTAL FACTOR PRODUCTIVITY TOTAL INVESTMENT TRADABLE GOOD TRADE DEFICIT TRADE POLICY TRADE SHOCK TRADE SHOCKS TRANSMISSION MECHANISMS UTILITY FUNCTION VALUE OF OUTPUT VOLATILITIES WAGES WEALTH WEIGHTS WITHDRAWAL WORLD FINANCIAL MARKET WORLD INTEREST RATE WORLD PRICE WORLD PRICES
Online Access:	http://documents.worldbank.org/curated/en/2014/07/19896101/budget-rules-resource-booms-dynamic-stochastic-general-equilibrium-analysis http://hdl.handle.net/10986/19355

Description
Summary:	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.

Budget Rules and Resource Booms : A Dynamic Stochastic General Equilibrium Analysis

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