Fiscal Rules for Resource Windfall Allocation: The Case of Trinidad and Tobago

September 16, 2016

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Format: Chicago

Keyra Primus. Fiscal Rules for Resource Windfall Allocation: The Case of Trinidad and Tobago, (USA: International Monetary Fund, 2016) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset and liability management, Consumption, Expenditure, National accounts, Public investment and public-private partnerships (PPP), Public investment spending, Sovereign wealth funds

Keywords: Consumption, Natural resource, Optimal Fiscal Policy, Production shock, Public investment and public-private partnerships (PPP), Public investment spending, Resource commodity, Resource income, Resource movement effect, Resource output, Resource rent, Resource revenue, Resource wealth, Resource windfall, Resource Windfalls, Resource-Rich Developing Countries, Revenue flow, Sovereign fund, Sovereign wealth funds, Windfall household, WP

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/188
Stock No:

WPIEA2016188
ISBN:

9781475536775
ISSN:

1018-5941

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