Rethinking Fiscal Policy in Oil-Exporting Countries

IMF Working Papers, May 17, 2019

Source details

Central argument: the PIH is not consistent with either intergenerational equity or long-term sustainability in the presence of uncertainty.
Implication: policies to achieve intergenerational equity and sustainability need to be more prudent and better anchored than the PIH.
Terminology preserved from source: permanent income hypothesis (PIH); PIH expenditure benchmark; PIH Policy.

Finding: there is a volatility tradeoff between government spending and wealth.
Re-assessments addressed in the paper:
- appropriate fiscal anchors;
- the vice of procyclicality;
- the (im)possibility of simultaneously smoothing consumption and ensuring intergenerational equity and sustainability.
Relevant concepts and keywords preserved: volatility tradeoff; government spending; wealth; procyclicality; smoothing consumption; intergenerational equity; sustainability; target path; targeted wealth; wealth dynamics.

Proposal: a "prudent wealth stabilization policy" designed to be more consistent with long-term fiscal policy goals.
Characteristics emphasized:
- more prudent than PIH-based policies;
- better anchored to long-term goals;
- relatively simple to implement and communicate.
Related technical terms preserved: wealth stabilization; wealth target; wealth dynamics; level of wealth; oil wealth; subsoil wealth; physical capital.

The PIH is criticized as an inadequate centerpiece for fiscal policy in commodity-exporting countries under uncertainty.
A tradeoff exists between stabilizing government spending and preserving wealth for future generations.
Long-held views on fiscal anchors and the costs of procyclicality are reassessed in light of volatility and sustainability concerns.
A pragmatic alternative—prudent wealth stabilization policy—is proposed as feasible and communicable.