Consumption Smoothing and Shock Persistence: Optimal Simple Fiscal Rules for Commodity Exporters

Fiscal policy in commodity exporting countries is often characterized as being needlessly procyclical: spending when commodity prices are high, and retrenching when commodity prices fall. In this paper we argue that these... [ view full abstract ]

Fiscal policy in commodity exporting countries is often characterized as being needlessly procyclical: spending when commodity prices are high, and retrenching when commodity prices fall. In this paper we argue that these procyclical rules are close tooptimal, and are preferred to rules where commodity revenues are saved to smooth household consumption (as in the literature). We show this in a suite of models with a share of financially constrained households, where fiscal policy takes the form of transfers. Because commodity prices are typically highly persistent, current income is close to permanent income, so commodity price shocks don’t need smoothing.