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At Center for Applied Economics (CEA), Department of Industrial Engineering, University of Chile and NBER, and Ministry of Finance, respectively. This paper was prepared for the Middle Eastern Department at the International Monetary Fund. The authors thank Pierre Dhonte, David Burton, Ugo Fasano, and seminar participants at the IMF for helpful comments and suggestions. All remaining errors are our responsibility. This paper presents the views of the authors and does not represent in any way the positions or views of the IMF or Chile’s Ministry of Finance.
A detailed discussion of this topic would constitute another paper altogether. For this reason we concentrates on how a stabilization fund can be used to implement optimal fiscal policy prescriptions.
See., e.g., Liuksila et al. (1994) for a discussion about: fiscal sustainability in oil producing countries.
For γ = 1 we may define, by continuity. u(cG, cP) = log(cG) + k log,(cP).
This requires distinguishing between government expenditures on the public good and government investments that produce a future flow of the public good.
If ρ = 1 we define H(u) = log(u).
It should be noted, though, that oil is not one of Argentina’s main exports.
Such transfers do happen in practice, for example, by extending the scope for government expenditures. Of course, this is not necessarily efficient.
Strictly speaking this assumes no uncertainty about an individuals life span. If individuals do not know when they will die. they may die with positive net assets but this effect is typically small and will be neglected.
Caballero (1990) finds a particular case where an explicit expression tor optimal consumption can be derived. Yet he assumes constant absolute risk aversion, which also has unappealing properties.
Of course, if producing countries sell part of their oil using future and forward contracts, the budget uncertainty will be less important.
This assumption makes the value of ρ irrelevant in this problem.
This is equivalent to having k1/γ = 4.
That is, it corresponds to the particular case of (2) where k = 0.
To derive this result evaluate (23) at t and t + 1, instead of t = 0, and equate the corresponding ratio to that obtained from (24).
This example is used to make a point, the assumptions do not hold in practice but the validity of the point does.
Their generations live for two periods, yet no additional insight is gained from this assumption. Also, the mix of public and private good provided is typically not optimal.
The remaining parameter values are: R = 1.04, βR = 1, n = 0, oil wealth is 100 and initial non-oil income is 30.
This opportunity cost could be negative if there is a low storage cost. a low real interest rate and good business opportunities for those who have oil in storage (convenience yield).
Furthermore, it can be shown that, with probability one, they eventually do one of the two.
He uses the Perron (1989) test which basically augments the standard Augmented Dickey-Fuller test to take into account structural breaks in levels and/or slope of a series.
See Michael et al. (1997) for an application to non-linear adjustment of real exchange rates towards PPP values.
The Beveridge and Nelson decomposition identifies that permanent component of a series as the long run value at which the series would tend if there are no further shocks. It predicts future prices using a rolling ARIMA model ([2,1,2] in this case).
In the latter two cases prices are nominal and refer to West Texas prices.
We also calculated the RMSE of 5-year-ahead forecasts using samples that ended in 1991 Q2 for both a random walk and a AR(1) process. The results (not reported) show a smaller RMSE for the random walk.
co also depends on μ0 and F0, but since these parameters remain constant in what follow they are omitted.
Consumption after applying the correction factors cam be much larger than under certainty equivalence!
The question in the second statement continues being posed in terms of an increase in per-capita expenditure.
For a criticism of the Chilean Copper Stabilization Fund along these lines see Basch and Engel 1993).
The CNM is an attempt to incorporate non-oil income into the analysis, but it does so without considering the effects of uncertainty.
Excluding oil extraction costs.
For example, if negative adjustment costs are larger than positive adjustment costs.
The are good political economy arguments to maintain this procedure. In particular, there could be important asymmetries in the way the political process reacts to positive and negative shocks.
Otherwise the solution to the CNM is equal to the solution to the BM, since the additional constraint imposed by the CNM is not binding. That is, the solution to the CNM differs from that for the BM either if non oil income of future generations grows without limit, or if oil wealth is not enough to raise every generation’s income above the income of the richest—in the absence of oil wealth—generation.
Since there is no bequest motive and no uncertainty, there will be no intergenerational saving.
This holds, for example, when the price of oil follows a geometric random walk with drift such that Et[Pt+1] = Pt.
The first terms in (43) and (44) capture wealth effects associated with changes in
Dependence on σ0 is omitted since it is assumed equal to zero.
Strictly speaking, L’Hospital’s rule must be invoked to go from (55) to (53).
This assumption, which is equivalent to having a drift equal to