A Comparison of Fiscal Rules for Resource-Rich Economies

Abstract

This paper produces a normative evaluation of fiscal rules for a resource-rich economy. Ad hoc fiscal rules might imply substantial welfare costs; the goal is to analyze the magnitude of these costs by quantitatively evaluating the relative welfare sub-optimality of these rules. I posit a closed form solution for the infinite horizon consumption problem of the planner of a resource-rich economy with resource price uncertainty and precautionary saving. The model is subsequently calibrated and simulated to provide a welfare-based comparison between the fiscal rules based on the Permanent Income Hypothesis and on the ad hoc Bird-in-Hand policy. The results of the simulation indicate the presence of a positive and substantial welfare loss suffered from switching to the Bird-in-Hand rule. This result is shown to be robust under different parameterizations.