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Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison

Open Access Article

Abstract:
Resource prices, and petroleum prices in particular, are volatile and difficult to predict, so government revenue in resource-producing regions is also uncertain and volatile. Adjusting government expenditure in response to these revenue movements involves economic, social and political costs. Many jurisdictions have established rule-based revenue stabilization funds to address revenue volatility, but there is little evidence on whether these funds improve welfare or if some fund designs increase welfare more than others. Using Monte Carlo techniques, we provide a quantitative welfare comparison of several types of rule-based stabilization funds for a petroleum-producing jurisdiction. We find large potential gains from the use of a fund to stabilize revenue, but some fund types reduce welfare, particularly those that accumulate large stocks of assets or debt. A fund that performs well, and is generally robust to changes in the simulation parameters, has a fixed deposit rate out of resource revenue and a fixed withdrawal rate out of assets.

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Energy Specializations: Energy and the Economy – Energy as a Productive Input; Petroleum – Markets and Prices for Crude Oil and Products; Energy Investment and Finance; Petroleum – Policy and Regulation

JEL Codes: Q21: Renewable Resources and Conservation: Demand and Supply; Prices, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, D62: Externalities

Keywords: Petroleum prices, Resource revenue volatility, Fiscal rules, Stabilization funds, Savings funds

DOI: 10.5547/01956574.36.2.6

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Published in Volume 36, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.