Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison

Landon, Stuart; Smith, Constance

doi:10.5547/01956574.36.2.6

Cited by 10 publications

(8 citation statements)

References 73 publications

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“…Spending only the interest on the fund is the approach of Norway's Government Pension Fund Global (GPFG), which incorporates precautionary savings because spending rises with the size of the fund. These findings are also consistent with Engel and Valdes (2000), who study precautionary savings and find that countries should adjust spending to oil shocks if the costs of doing so are not too large; Landon and Smith (2015), who advocate fixed deposit and withdrawal rates into SWFs; and Pieschacon (2012), who empirically finds that Norway's approach has shielded the economy from oil price fluctuations, relative to Mexico's approach of spending oil revenue as it is earned. They differ from Wagner and Elder (2005), who advocate drawing down fiscal stabilization funds, though they focus on business cycles which are more predictable than oil prices.…”

Section: Introductionsupporting

confidence: 81%

Leave the volatility fund alone: Principles for managing oil wealth

Wills

2018

Journal of Macroeconomics

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How should capital-scarce countries manage their volatile oil revenues? Existing literature is conflicted: recommending both to invest them at home, and save them in sovereign wealth funds abroad. I reconcile these views by combining a stochastic model of precautionary savings with a deterministic model of a capital-scarce resource exporter. I show that both developed and developing countries should build an offshore Volatility Fund, but refrain from depleting it when oil prices fall because it cannot be known when, or if, they will rise again. Instead, consumption should adjust and only the interest on the fund should be consumed. To do this I develop a parsimonious framework that nests a variety of existing results as special cases, which I present in four principles: for capital-abundant countries, i) smooth consumption using a Future Generations Fund, and ii) build a Volatility Fund quickly, then leave it alone; and for capital-scarce countries, iii) consume, invest and deleverage, and iv) invest part of the Volatility Fund domestically, then leave it alone.

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Section: Introductionsupporting

confidence: 81%

Leave the volatility fund alone: Principles for managing oil wealth

Wills

2018

Journal of Macroeconomics

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“…These jurisdictions experience highly volatile revenues and are, therefore, more likely to benefit from a rule (Céspedes and Velasco, 2014). Using numerical simulations for a stylized oil-producing country, Maliszewski (2009) concludes that ad hoc savings rules perform poorly, but Engel et al (2011) and Landon and Smith (2015) find considerable benefit from the use of simple savings rules for commodity exporters.…”

Section: Introductionmentioning

confidence: 99%

Does the design of a fiscal rule matter for welfare?

Landon

Smith

2017

Economic Modelling

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This study uses Monte Carlo methods to examine the impact on welfare of several types of commonly used fiscal rules. The simulations employ an expected intertemporal welfare function and the parameters from a three-variable structural VAR estimated using data for sixteen European countries. The VAR captures the potential interaction effects between output, government spending and revenue. We find welfare gains from many, but not all, of the fiscal rules. The best rules target a zero structural deficit and cause government spending volatility to fall by about one third. However, a simple rule, where government expenditure is set equal to a one-period ahead forecast of revenue, performs almost as well. In particular, this simple rule yields a welfare gain and a reduction in volatility similar to that of the more complicated zero structural deficit rule adopted by Switzerland and several other countries. Balanced budget rules perform less well than rules that target the structural deficit. A rule that keeps real per capita government spending equal to a constant-a type of rule adopted by some U.S. states-yields relatively low welfare and often leads to significant debt accumulation. These results highlight the importance of the appropriate design of a fiscal rule.

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“…be in the interest of politicians and elites, it is, under some circumstances, a realistic outcome. A simple and rigid framework, such as a fund and a spending rule, partly ties the hands of future politicians by making the breaking of the rule easy to detect for media, international bodies and non-incumbent politicians (Bacon and Tordo, 2006;Engel and Valde ´s, 2000;Landon and Smith, 2015). In particular, it is simpler to implement than a theoretically optimal rule that takes into account all future revenue flows, since this requires forecasting the notoriously unpredictable oil price (Landon and Smith, 2015).…”

Section: Introductionmentioning

confidence: 99%

Should Developing Countries Constrain Resource-Income Spending? A Quantitative Analysis of Oil Income in Uganda

Hassler

Krusell

Shifa³

et al. 2017

The Energy Journal

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A large increase in government spending following resource discoveries often entails political risks, inefficient investments and increased volatility. Setting up a sovereign wealth fund with a clear spending constraint may decrease these risks. On the other hand, in a capital scarce developing economy with limited access to international borrowing, such a spending constraint may lower welfare by reducing domestic capital accumulation and hindering consumption increases for the currently poor. These two contradicting considerations pose a dilemma for policy makers in deciding whether to set up a sovereign wealth fund with a spending constraint. Using Uganda’s recent oil discovery as a case study, this paper presents a quantitative macroeconomic analysis and examines the potential loss of constraining spending through a sovereign wealth fund with a simple spending rule. We find that the loss is relatively low and unlikely to dominate the political risks associated with increased oil spending. Thus, such a spending constraint appears well warranted.

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Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison

Abstract: Short excerpts of these working papers may be quoted without explicit permission provided that full credit is given to the source.

Cited by 10 publications

References 73 publications

Leave the volatility fund alone: Principles for managing oil wealth

Leave the volatility fund alone: Principles for managing oil wealth

Does the design of a fiscal rule matter for welfare?

Should Developing Countries Constrain Resource-Income Spending? A Quantitative Analysis of Oil Income in Uganda

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