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We use a calibrated multi-sector DSGE model to analyze the likely impact of oil windfalls on the Ghanaian economy, under alternative fiscal and monetary policy responses. We distinguish between the short-run impact, associated with demand-related pressures, and the medium run impact on competitiveness and growth. The impact on inflation and the real exchange rate could be moderate, especially if the fiscal authorities smooth oil-related spending or increase public spending's import content. However, a policy mix that results in both a fiscal expansion and the simultaneous accumulation of the foreign currency proceeds from oil as international reserves-to offset the real appreciation-would raise demand pressures and crowd-out the private sector. In the medium term, the negative impact on competitiveness-resulting from "Dutch Disease" effects-could be small, provided public spending increases the stock of productive public capital. These findings highlight the role of different policy responses, and their interaction, for the macroeconomic impact of oil proceeds. This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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We use a multi-sector dynamic stochastic general equilibrium (DSGE) model-calibrated to the Ghanaian economy-to analyse the short-term impact of oil windfalls in low-income countries (LICs) and the role of various fiscal and monetary policy responses. The model includes limited access to international capital markets, limited participation by residents in the domestic financial system and limited labour mobility across sectors, features that are pervasive in these countries. Relative to developed countries, oil windfalls are likely to have larger aggregate demand pressures. A policy of fiscal smoothing-associated with a sovereign wealth fund-can help achieve macroeconomic stability and improve welfare. On the other hand, accumulation of reserves in response to the windfallwithout fiscal backing-can crowd out the private sector and reduce welfare. These findings highlight the importance of policy coordination for the macroeconomic effects of oil proceeds in LICs.JEL classification: E20, E62, E63, F41 † We thank Enrico Berkes for outstanding research assistance. The views expressed in this paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy.

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