Current Account and Precautionary Savings for Exporters of Exhaustible Resources

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.Exporters of exhaustible resources have historically exhibited higher income volatility than other economies, suggesting a heightened role for precautionary savings. This paper uses a parameterized small open economy model to quantify the role of precautionary savings in economies with exhaustible resources, when the only source of uncertainty is the price of the exhaustible resource. Results show that the precautionary motive can generate sizable external sector savings. When aggregated over the sample countries, precautionary savings in 2006 add up to 3.2 percent of GDP. The quantitative importance of the precautionary motive varies considerably across the sample countries and is driven primarily by the weight of exhaustible resource revenues in future income. The parameterized model fares well at capturing current account balances in both cross-section and time-series data.

Managing and Harnessing Volatile Oil Windfalls

“…We do not take the 2.4 percent of the Norwegian SWF as this may be low due to the dominant effect of the downturn in recent years. Bems and Carvalho Filho (2011) also use a high rate of return of 4 percent. efficiency units is zero, so r ¼ r ¼ 1.9 percent.…”

“…As the size of precautionary saving is quite sensitive to even small degrees of mean reversion (cf., Bems and Carvalho Filho, 2011), we also estimate the AR(1) process (7 0 ), but without trend, and obtain for crude oil m P ÃẐ P ¼ 0.27 (t-ratio ¼ 1.33) andẐ P ¼ 0.066 (t-ratio ¼ 1.16) andŝ P Ã ¼ 0.29, which corresponds to a mean price of exp(m P ) U.S.$ per barrel and a volatility of s P ¼ 0.26. For the gas price over the same period 1960-2011, we obtain m P ÃẐ P Ã ¼ 0.21 (t-ratio ¼ 1.70) andẐ P Ã ¼ 0.066 (t-ratio ¼ 1.54), which corresponds to a mean price of exp(m P ) ¼ U.S.$32 per barrel of oil equivalent,Ẑ P ¼ 0.064 and a volatility ofŝ P ¼ 0.20.…”

“…Oil is thus used as a shorthand for a windfall of foreign exchange and oil price as a shorthand for commodity prices. 2 Earlier work uses a model of a small open economy that exports exhaustible resources to quantify optimal precautionary saving in response to volatile resource prices and demonstrates that current account balances of countries with a greater weight of resource revenue to future income are bigger (Bems and de Carvalho Filho, 2011). 3 Limited commitment incentivizes the government to pay down external debt along the adjustment path (for example, Cohen and Sachs, 1986;Aguiar and Amador, 2011).…”

The current account and precautionary savings for exporters of exhaustible resources

“…In particular, the optimal choice of b t + 1 from the perspective of year t is taken as the initial Bems and de Carvalho Filho (2009). 11 The model parameterization in this paper contains several differences from an earlier working paper (Bems and de Carvalho Filho, 2009). First, the assumed curvature in the utility function is lowered from σ = 6 to σ = 2 to reflect the standard choice in the RBC literature.…”

Day After Tomorrow: Designing an Optimal Fiscal Strategy for Libya

“…Unless the economy is diversified to create additional sources of revenue before the depletion of hydrocarbon resources, the contraction of fiscal revenue will be steep and will significantly constrain expenditure at that time. Although the optimal consumption path determined according to the PIH provides a robust point of reference for fiscal policymaking, the volatility of oil prices and greater uncertainty about future hydrocarbon revenues require additional -precautionary -savings (Leland, 1968;Bems and Carvalho Filho, 2009). Furthermore, based on a stylized model of optimal precautionary saving and investment under uncertainty, Cherif and Hasanov (2012) show that policymakers need to build up precautionary savings in case the economy is hit by a negative and persistent income shock.…”