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Optimal Fiscal Policy with Oil Revenues

Author

Listed:
  • Rouhollah Shahnazi

    (Ph.D. Candidate, Department of Economic, Faculty of Administrative Sciences and Economics, University of Isfahan)

  • Mohsen Renani

    (Associate Professor, Department of Economic, Faculty of Administrative Sciences and Economics, University of Isfahan)

  • Rahim Dalali Esfahani

    (Associate Professor, Department of Economic, Faculty of Administrative Sciences and Economics, University of Isfahan)

  • Rahman Khoshakhlagh

    (Professor, Department of Economic, Faculty of Administrative Sciences and Economics, University of Isfahan)

  • Mohamad Vaez

    (Assistant Professor, Department of Economic, Faculty of Administrative Sciences and Economics, University of Isfahan)

Abstract

This paper focuses on the impacts of oil revenues on government fiscal policy when we have externality of human capital in economic. Therefore, we devised a fiscal policy capable to make the decentralized economy to achieve the first-best equilibrium in the Uzawa-Lucas model. The results of this paper show that optimal policy requires making use of a subsidy to investment in human and physical capital. Human capital can be financed by oil revenues and tax on labor income and physical capital can be financed by oil revenues. Government size dependent to oil revenues: When share of oil revenue in GDP or ratio of oil revenue in physical capital increase, government size increases and conversely. The results show the return on the physical capital must be free of taxes, but tax on labor income needed to balance the government budget in the steady state or in the transitional phase.

Suggested Citation

  • Rouhollah Shahnazi & Mohsen Renani & Rahim Dalali Esfahani & Rahman Khoshakhlagh & Mohamad Vaez, 2011. "Optimal Fiscal Policy with Oil Revenues," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 16(2), pages 73-88, spring.
    • Handle: RePEc:eut:journl:v:16:y:2011:i:2:p:73
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    References listed on IDEAS

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    1. Lutz G. Arnold, 2000. "Endogenous technological change: a note on stability," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(1), pages 219-226.
    2. Mr. Rodrigo O. Valdes & Mr. Eduardo E Engel, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," IMF Working Papers 2000/118, International Monetary Fund.
    3. Pedro Garcia-Castrillo & Marcos Sanso, 2000. "Human Capital and Optimal Policy in a Lucas-type Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 757-770, October.
    4. Wojciech Maliszewski, 2009. "Fiscal Policy Rules for Oil-Producing Countries: A Welfare-Based Assessment," IMF Working Papers 2009/126, International Monetary Fund.
    5. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    Cited by:

    1. Davood Danesh Jafari & Hamid Nazemian & Javid Bahrami & Mohammad Hassan Kheiravar, 2021. "Effect of Oil Revenues on Certain Macroeconomic Variables in Selected Oil-Exporting Countries: A Panel Data Approach," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 3-21.
    2. Davood Danesh Jafari & Hamid Nazemian & Javid Bahrami & Mohammad Hassan Kheiravar, 2020. "Effect of Oil Revenues on Government Size in Selected Oil-exporters with an Emphasis on Iran s Economy," International Journal of Energy Economics and Policy, Econjournals, vol. 10(5), pages 485-497.

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