Oil Windfalls, Fiscal Policy and Money Market Disequilibrium

Salman Huseynov () and Vugar Ahmadov

No wp1051, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: In this paper, we base our policy analyses and simulations on three different specifications of a DSGE model developed for a CIS oil rich country and check the impact of the oil windfalls. The first proposed specification is a classical one with a Taylor rule and the second one is a recently new specification with a money growth rule. Beside two familiar specifications, we propose a new specification which assumes a temporary money market disequilibrium in the short run. This disequilibrium is a result of the fiscal misbalance and (non-primary) pro-deficit policy pursued by the fiscal authority. We show that all three specifications allow the fiscal authority to act as the main actor in propagating and amplifying the effects of the oil price shocks to the rest of the economy. When an oil shock hits the economy, its first round effect operates through oil fund transfers to the budget. The second round effects result from an increase in government consumption and government investment expenditures, which augments public capital affecting total factor productivity (TFP) and production, as well as the aggregate demand. We also find that despite significant differences, all three specifications demonstrate similar response dynamics.

Keywords: Fiscal Policy; Oil Windfalls; Public investment; Market Disequilibrium; Oil rich country (search for similar items in EconPapers)
JEL-codes: E47 E58 E61 (search for similar items in EconPapers)
Pages: pages
Date: 2013-06-01
New Economics Papers: this item is included in nep-dge, nep-ene and nep-mac
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Citations: View citations in EconPapers (8)

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