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Ghosh, Atish and Jonathan Ostry, 1997, “Macroeconomic Uncertainty, precautionary saving, and the current account,” Journal of Monetary Economics, Vol. 40, pp. 121-139.
Segura, A., 2006, “Management of Oil Wealth under the Permanent Income Hypothesis: The Case of Sao Tome and Principe,” IMF working paper 06/183.
We are grateful to Atish Ghosh, Juan Zalduendo, Gian-Maria Milesi-Ferretti, Jaewoo Lee, Rudolfs Bems, Irineu de Carvalho Filho, and participants of the PDR seminar for their useful comments on earlier drafts.
A closed form solution for optimal consumption would be available for quadratic utility (whose marginal utility is linear) or a certain CARA (constant absolute risk aversion) class utility such as exponential utility. Under stochastic uncertainty, CRRA (and CARA as well) preference implies positive precautionary saving as the third derivative of the utility function is not zero. See Ghosh and Ostry (1997) for the derivation of the optimal current account under precautionary saving for CARA preference. Also see Bems and de Carvalho Filho (2008) for simulation results using CRRA preference.
Under no consumption tilting and the assumed independence of non-oil cash flow with respect to oil production, the total current account as shown in (7) remains unaffected for a permanent increase in oil output while improves for a transitory increase. Since the oil current account always improves with an increase in oil output, the non-oil current account must decline for a permanent increase in oil output. The impact of a transitory increase in oil output depends on the relative size of improvements in the total and oil current accounts.
This paper has focused on oil wealth but the same type of analysis can be conducted for other types of nonrenewable resources such as natural gas, copper etc.
where ΔZit =[ΔNCFit, ΔNCFit-1] and ΔWit-1= [ΔROWit-1, ΔROWit-2]′ with NCF and ROW denoting real per capita non-oil cash flow and real oil wealth, respectively. The expected values of future non-oil cash flow can be generated by iterating the VAR forward for given path of ROW.
Using consumption data from BP for the other countries yields comparable results except for Saudi Arabia since for this country, the BP data indicate domestic consumption of 9 percent of GDP compared to 4 percent of GDP using the data on non-oil GDP
It should be noted that for Saudi Arabia, if the correct estimate of domestic consumption of oil is 9 percent of GDP (based on BP data), the equilibrium non-oil current account would be comparable to the underlying nonoil current account even at current oil prices.