Consumption Smoothing and Shock Persistence : Optimal Simple Fiscal Rules for Commodity Exporters
A common criticism of balanced budget fiscal rules is that they increase the consumption volatility of financially constrained households who are unable to smooth consumption. This paper evaluates the welfare consequences of simple fiscal rules in...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2017
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/384311493124785251/Consumption-smoothing-and-shock-persistence-optimal-simple-fiscal-rules-for-commodity http://hdl.handle.net/10986/26472 |
| Summary: | A common criticism of balanced budget
fiscal rules is that they increase the consumption
volatility of financially constrained households who are
unable to smooth consumption. This paper evaluates the
welfare consequences of simple fiscal rules in a model of a
small commodity-exporting country with a share of
financially constrained households, where fiscal policy
takes the form of transfers. A main finding is that balanced
budget rules for commodity revenues often outperform more
sophisticated fiscal rules where commodity revenues are
saved in a Sovereign Wealth Fund (SWF). Because commodity
price shocks are typically highly persistent, the
households' current income is close to their permanent
income, making balanced budget rules close to optimal. For
commodities like oil, where price shocks are highly
persistent, it is optimal to spend more than two-thirds of
windfall revenues in times of high prices, and in some cases
even spend the entire windfall. But for commodities where
price shocks are less persistent, like bananas or sugar, the
optimal rule involves spending less than half of
above-average commodity revenues (with the rest saved in a
SWF). It is also best to respond counter-cyclically to
non-resource GDP shocks, because those shocks are less
persistent (and also affect households other income). The
government does not have the ability to perfectly smooth
constrained households’ consumption without adversely
affecting unconstrained households. |
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