Budget Rules and Resource Booms and Busts : 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 policy lessons or rules of thumb. When a resource pric...

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Main Authors:	Devarajan, Shantayanan, Dissou, Yazid, Go, Delfin S., Robinson, Sherman
Format:	Journal Article
Published:	Published by Oxford University Press on behalf of the World Bank 2018
Subjects:	NATURAL RESOURCES BUDGET RULES ACCOUNTABILITY BUDGET CONSTRAINT CASH TRANSFERS COMMODITIES DEBT CONSUMPTION
Online Access:	http://hdl.handle.net/10986/30129

id	okr-10986-30129
recordtype	oai_dc
spelling	okr-10986-301292021-05-25T10:54:40Z Budget Rules and Resource Booms and Busts : A Dynamic Stochastic General Equilibrium Analysis Devarajan, Shantayanan Dissou, Yazid Go, Delfin S. Robinson, Sherman NATURAL RESOURCES BUDGET RULES ACCOUNTABILITY BUDGET CONSTRAINT CASH TRANSFERS COMMODITIES DEBT CONSUMPTION 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. 2018-08-03T19:10:30Z 2018-08-03T19:10:30Z 2017-02 Journal Article World Bank Economic Review 1564-698X http://hdl.handle.net/10986/30129 CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Published by Oxford University Press on behalf of the World Bank Publications & Research :: Journal Article Publications & Research Africa Sub-Saharan Africa Angola Gabon Nigeria
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
topic	NATURAL RESOURCES BUDGET RULES ACCOUNTABILITY BUDGET CONSTRAINT CASH TRANSFERS COMMODITIES DEBT CONSUMPTION
spellingShingle	NATURAL RESOURCES BUDGET RULES ACCOUNTABILITY BUDGET CONSTRAINT CASH TRANSFERS COMMODITIES DEBT CONSUMPTION Devarajan, Shantayanan Dissou, Yazid Go, Delfin S. Robinson, Sherman Budget Rules and Resource Booms and Busts : A Dynamic Stochastic General Equilibrium Analysis
geographic_facet	Africa Sub-Saharan Africa Angola Gabon Nigeria
description	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.
format	Journal Article
author	Devarajan, Shantayanan Dissou, Yazid Go, Delfin S. Robinson, Sherman
author_facet	Devarajan, Shantayanan Dissou, Yazid Go, Delfin S. Robinson, Sherman
author_sort	Devarajan, Shantayanan
title	Budget Rules and Resource Booms and Busts : A Dynamic Stochastic General Equilibrium Analysis
title_short	Budget Rules and Resource Booms and Busts : A Dynamic Stochastic General Equilibrium Analysis
title_full	Budget Rules and Resource Booms and Busts : A Dynamic Stochastic General Equilibrium Analysis
title_fullStr	Budget Rules and Resource Booms and Busts : A Dynamic Stochastic General Equilibrium Analysis
title_full_unstemmed	Budget Rules and Resource Booms and Busts : A Dynamic Stochastic General Equilibrium Analysis
title_sort	budget rules and resource booms and busts : a dynamic stochastic general equilibrium analysis
publisher	Published by Oxford University Press on behalf of the World Bank
publishDate	2018
url	http://hdl.handle.net/10986/30129
_version_	1764471281052286976

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

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