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Optimal fiscal management of commodity price shocks

Pierre-Richard Agénor ()

Journal of Development Economics, 2016, vol. 122, issue C, 183-196

Abstract: This paper analyzes how low-income countries should optimally respond, through fiscal policy, to commodity price shocks. The model accounts for imperfect access to world capital markets and a variety of externalities associated with public infrastructure, including utility benefits, a direct complementarity effect with private investment, and reduced distribution costs. However, public capital is also subject to congestion and absorption constraints, with the latter affecting the efficiency of infrastructure investment. The optimal windfall allocation rule between spending today and asset accumulation is determined so as to minimize a social loss function defined in terms of the volatility of private consumption and either the nonresource primary fiscal balance or a more general index of macroeconomic stability, which accounts for the volatility of the real exchange rate.

Keywords: Commodity price shocks; Public infrastructure; Sovereign funds; Open-economy DSGE models; Optimal resource windfall allocation (search for similar items in EconPapers)
JEL-codes: F41 H41 H54 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Optimal Fiscal Management of Commodity Price Shocks (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:122:y:2016:i:c:p:183-196

DOI: 10.1016/j.jdeveco.2016.05.005

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