Optimal Monetary Responses to Oil Discoveries

Wills, Samuel

doi:10.2139/ssrn.2434931

Cited by 17 publications

(18 citation statements)

References 49 publications

(50 reference statements)

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“…While a discovery typically will not result in oil production for over half a decade, it can be considered a step-change in known national wealth, implying increased economic output in the future and a permanent increase in consumption potential for the country. A discovery can therefore generate expectations of increased economic activity and consumption in the future (Arezki et al, 2016), however any subsequent impact on output is also affected by policy choices made by government, including borrowing in the short run to finance increases in investment and consumption (Eastwood and Venables (1982), Pieschacon (2012) & Wills (2014). Furthermore, it has been proposed that oil discoveries can trigger a country's accumulation of unsustainable levels of debt (Mansoorian, 1991), while government decisions can be distorted by citizen expectations leading to excessive consumption spending (Collier, 2017).…”

Section: Introductionmentioning

confidence: 99%

Evidence for a Presource Curse? Oil Discoveries, Elevated Expectations, and Growth Disappointments

Cust¹,

Mihalyi

2017

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The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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Section: Introductionmentioning

confidence: 99%

Evidence for a Presource Curse? Oil Discoveries, Elevated Expectations, and Growth Disappointments

Cust¹,

Mihalyi

2017

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“…Investment may also fall during this period as the long interest will rise in response to anticipated hikes in the future short interest rate. The best response for the monetary authorities is then to expand monetary policy during this period in order to fight this temporary unemployment (e.g., Wills, 2013). In fact, the central bank could build up reserves to avoid the appreciation of the real exchange rate which would be a fund of some sort.…”

Section: Discussionmentioning

confidence: 99%

Guidelines for exploiting natural resource wealth

Ploeg¹

2014

Oxford Review of Economic Policy

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The principles of how best to manage the various components of national wealth are outlined, where the permanent income hypothesis, the Hotelling rule and the Hartwick rule play a prominent role. As far as managing natural resource wealth is concerned, a case is made to use an intergenerational sovereign wealth fund to smooth consumption across generations, a liquidity fund for the precautionary buffers to deal with commodity price volatility, and an investment fund to park part of the windfall until the country is ready to absorb extra spending on domestic investment. Capital scarcity implies that a positive part of the windfall should be spent on domestic investment. The conclusions highlight the political economy problems that will have to be tackled with these normative proposals for managing wealth.

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“…All of these examples assume that the supply of resources is exogenous, costless and inexhaustible. Bems and de Carvalho Filho (2011) study precautionary saving and the current account allowing for an exhaustible supply (which is still exogenous and costless to extract); Dib (2008) and Benkhodja (2014) allow for costly extraction, but not exploration or depletion; Wills (2013) and Arezki et al (2015) study the effects of exogenous reserve discoveries when viewed as news about future production. None of these studies consider reserves as an endogenous state variable that responds to price signals.…”

Section: Figure 1: Trends and Cycles In Real Commodity Prices Since 1900mentioning

confidence: 99%

Commodity price volatility with endogenous natural resources

Hansen

Gross

2018

European Economic Review

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Natural resource reserves are exogenous in models of small commodity exporters. Changes in the stock of reserves play no role in the macroeconomy including in business cycle volatility, trade dynamics or exchange rate volatility. We consider richer supply dynamics and model exploration and depletion. We show that an endogenous supply of reserves is important for capturing the stylised facts associated with commodity price shocks including a commodity currency, the crowding-out of noncommodity activity (Dutch-Disease) and a volatile business cycle. We also consider how exploration and depletion affect the ranking of optimal monetary and taxation policies. When natural resource reserves are held fixed, monetary policy is an efficient tool for stabilising the effects of commodity price shocks. However, when exploration and depletion are accounted for, using interest rates to stabilise the effects of commodity price changes becomes inefficient. Using taxes on the resource sector, specifically an ad valorem royalty, remains efficient.

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Optimal Monetary Responses to Oil Discoveries

Cited by 17 publications

References 49 publications

Evidence for a Presource Curse? Oil Discoveries, Elevated Expectations, and Growth Disappointments

Evidence for a Presource Curse? Oil Discoveries, Elevated Expectations, and Growth Disappointments

Guidelines for exploiting natural resource wealth

Commodity price volatility with endogenous natural resources

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