Macroeconomic policy in resource-rich economies

Thesis

This thesis considers how fiscal and monetary policy should be conducted in resourcerich economies. It consists of three papers addressing: whether governments should spend, save or invest volatile oil income; the assets they should save in; and how monetary policy should respond.

The first, “Eight principles for managing resource wealth”, shows that capital-scarce countries should save relatively less against oil price volatility, and invest more in domestic capital. They also should prepare for volatility in advance, and treat savings as a source of income rather than a temporary buffer. To show this the paper develops a framework that nests a variety of existing results, which are presented in eight principles.

The second, “The Elephant in the Ground: Oil extraction and asset allocation in sovereign wealth funds”, shows that governments should use sovereign wealth funds to offset oil price risk, extract oil faster if its price is pro-cyclical, and use precautionary savings to manage any residual volatility. To do this it combines three strands of literature for the first time: on continuous-time portfolio theory, oil extraction and precautionary savings.

The third, “Optimal monetary responses to oil discoveries”, addresses the anticipation effects around an oil discovery. It shows that the terms of trade will need to appreciate twice: once when oil is discovered and consumers anticipate future revenues; and again when the government begins spending the revenues. Oil wealth will give the monetary authority an incentive to appreciate the terms of trade, in addition to stabilising domestic inflation and the output gap. Optimal policy is well-approximated by a standard monetary rule that also responds to expected changes in the natural level of output.

Authors: Wills, S

• Publication date: 2013
• DOI: 10.5287/ora-2r081gk7r
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: Oxford University, UK
• Language: English
• Keywords: monetary policy; oil; Natural resources; news shock; fiscal policy; sovereign wealth funds
• Subjects: Development economics; Financial economics; Economics; Macro and international economics