The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Managing resource revenues is a critical policy issue for small open resource-rich
countries. This paper uses an open economy dynamic stochastic general equilibrium
model to analyze the transmission of resource price shocks and a shock to resource
production in the Trinidad and Tobago economy. It also applies alternative fiscal rules to
determine the optimal allocation of resource windfalls between spending today and saving
in a sovereign wealth fund. The results show that spending all the resource windfall on
consumption and investment creates more volatility and amplifies Dutch disease effects,
when compared to the case where all the excess revenues are saved. Also, neither a policy
of full spending nor full saving of the surplus revenue inflows is optimal if the
government is concerned about both household welfare and fiscal stability. In order to
minimize deviations from both objectives, the optimal fiscal response suggests that a
larger fraction of the resource windfalls should be saved.