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Optimal Fiscal Strategy for Oil Exporting Countries

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  • Eduardo M.R.A. Engel
  • Rodrigo Valdés

Abstract

This paper develops simple guidelines for scal policy in oil producing countries, focusing on three issues: intergenerational oil distribution, precautionary saving, and adjustment costs. The paper presents a framework to analyze how the revenue generated by an exhaustible source of wealth that belongs to the government should be distributed between current and future generations. This framework is used to show the strengths and limitations of existing answers, which motivates a new approach for dealing with this question. The paper derives simple, closed form approximations to the optimal level of government expenditure when an important part of government revenue is generated by an uncertain and exhaustible natural resource such as oil. Price uncertainty, budget uncertainty, and the (possibly asymmetric) costs of adjusting expenditure levels are considered.

Suggested Citation

  • Eduardo M.R.A. Engel & Rodrigo Valdés, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," Documentos de Trabajo 78, Centro de Economía Aplicada, Universidad de Chile.
    • Handle: RePEc:edj:ceauch:78
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    1. Mr. Graham C. Scott, 1996. "Government Reform in New Zealand," IMF Occasional Papers 1996/009, International Monetary Fund.
    2. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    3. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
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