Rethinking Fiscal Policy in Oil-Exporting Countries
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Summary:
We examine the existing fiscal policy paradigm in commodity-exporting countries. First, we argue that its centerpiece—the permanent income hypothesis (PIH)—is not consistent with either intergenerational equity or long-term sustainability in the presence of uncertainty. Policies to achieve these goals need to be more prudent and better anchored than the PIH. Second, we point out the presence of a volatility tradeoff between government spending and wealth and re-assess long-held views on the appropriate fiscal anchors, the vice of procyclicality, and the (im)possibility of simultaneously smoothing consumption and ensuring intergenerational equity and sustainability. Finally, we propose what we call a prudent wealth stabilization policy that would be more consistent with long-term fiscal policy goals, yet relatively simple to implement and communicate.
Series:
Working Paper No. 2019/108
Subject:
Consumption Expenditure Financial institutions Fiscal policy National accounts Oil prices Prices Stocks
English
Publication Date:
May 17, 2019
ISBN/ISSN:
9781498314749/1018-5941
Stock No:
WPIEA2019108
Pages:
41
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