Rethinking Fiscal Policy in Oil-Exporting Countries

No 2019/108, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; interest rate; physical capital; government spending; Fiscal policy; oil exporters; permanent income hypothesis; fiscal rules; wealth stabilization; target path; oil price shock; spending policy; PIH expenditure benchmark; oil wealth; wealth target; subsoil wealth; level of wealth; PIH Policy; wealth dynamics; targeted wealth; Consumption; Oil prices; Stocks (search for similar items in EconPapers)
Pages: 41
Date: 2019-05-17
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