The long–run macroeconomic impacts of fuel subsidies

Michael Plante

No 1303, Working Papers from Federal Reserve Bank of Dallas

Abstract: Many developing and emerging market countries have subsidies on fuel products. Using a small open economy model with a non-traded sector I show how these subsidies impact the steady state levels of macroeconomic aggregates such as consumption, labor supply, and aggregate welfare. These subsidies can lead to crowding out of non-oil consumption, inefficient inter-sectoral allocations of labor, and other distortions in macroeconomic variables. Across steady states aggregate welfare is reduced by these subsidies. This result holds for a country with no oil production and for a net exporter of oil. The distortions in relative prices introduced by the subsidy create most of the welfare losses. How the subsidy is financed is of secondary importance. Aggregate welfare is significantly higher if the subsidies are replaced by lump-sum transfers of equal value.

Keywords: Fiscal; policy (search for similar items in EconPapers)
Pages: 47 pages
Date: 2013
New Economics Papers: this item is included in nep-ene and nep-mac
Note: Published as: Plante, Michael (2014), "The Long–run Macroeconomic Impacts of Fuel Subsidies," Journal of Development Economics 107: 129-143.
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The long-run macroeconomic impacts of fuel subsidies (2014)
Working Paper: The Long-Run Macroeconomic Impacts of Fuel Subsidies (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:1303

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DOI: 10.24149/wp1303

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