Fiscal sustainability, volatility and oil wealth

A stochastic analysis of fiscal spending rules

Authors


  • We thank Christos Kostopoulos of the World Bank for many discussions on the Azerbaijan case study, and Alexander France (UvA), the editor and the two referees for their many constructive comments.

Abstract

Whether fiscal policy is sustainable depends on a government’s future revenue and expenditure streams, both of which are highly uncertain. In commodity-rich countries, this problem is intensified by unpredictable and volatile commodity prices. We show how spending rules for oil income and non-oil primary deficits interact and influence the stochastic distribution of future debt stocks and demonstrate the variance reducing impact of feedback rules for primary deficits in a case study of oil-and-gas exporter Azerbaijan.

Ancillary