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Mr. David Coady, Valentina Flamini, and Matias Antonio

. These concerns can be addressed by incorporating price-smoothing rules (such as a cap on the magnitude of domestic price changes) into automatic mechanisms, thus avoiding large increases in domestic prices while ensuring full pass-through of international price movements over the medium term. David Coady is a Deputy Division Chief, Valentina Flamini is an Economist, and Matias Antonio is a Research Assistant, all in the IMF’s Fiscal Affairs Department .

Mr. Benedict F. W. Bingham, Mr. James Daniel, and Mr. Giulio Federico
This paper examines the case for government-led smoothing of domestic petroleum prices in the face of volatile international prices. Governments in most developing and transition countries engage in petroleum price smoothing, as the survey of country practice carried out for this paper shows. This paper reviews the potential welfare implications of petroleum price volatility, and assesses different price smoothing rules on the basis of historical oil prices. These simulations reveal the presence of a sharp trade-off between price smoothing and fiscal stability, suggesting that developing and transition country governments should engage in limited price smoothing and, if possible, rely on hedging instruments to do so.
Mr. Benedict F. W. Bingham, Mr. James Daniel, and Mr. Giulio Federico

-month) and/or a max-min rule with an automatic updating of the max-min price band. 27 More ambitious price smoothing rules appear to leave the government over-exposed to oil price-related fiscal risk, especially given the limited availability of effective risk-coping instruments for most developing country governments, as discussed in the next sub-section. Therefore, while there is a case for government-led petroleum price smoothing (as discussed in Section III ), governments should not attempt to provide excessive price insurance to the private sector, given its

Mr. David Coady, Valentina Flamini, and Louis Sears
Understanding who benefits from fuel price subsidies and the welfare impact of increasing fuel prices is key to designing, and gaining public support for, subsidy reform. This paper updates evidence for developing countries on the magnitude of the welfare impact of subsidy reform and its distribution across income groups, incorporating more recent studies and expanding the number of countries. These studies confirm that a very large share of benefits from price subsidies goes to high-income households, further reinforcing existing income inequalities. The results can also help to approximate the welfare impact of subsidy reform for countries where the data necessary for such an analysis is not available.
International Monetary Fund. Fiscal Affairs Dept.

Abstract

This issue of the Fiscal Monitor examines the conduct of fiscal policy under the uncertainty caused by dependence on natural resource revenues. It draws on extensive past research on the behavior of commodity prices and their implications for macroeconomic outcomes, as well as on extensive IMF technical assistance to resource-rich economies seeking to improve their management of natural resource wealth.

Philip Daniel, Mr. Sanjeev Gupta, Mr. Todd D. Mattina, and Mr. Alex Segura-Ubiergo

following large and abrupt changes in resource prices. For instance, the oil price spikes in 1974 and 1979 would have increased structural oil revenues by more than 15 percent with a price-smoothing rule that included forward-looking prices (such as the one represented by the red line in Chart 1 ). This can lead to a corresponding large increase in government expenditures despite the price-smoothing rule, which may be difficult for an economy to absorb. To control spending volatility further, the smoothing framework can be complemented by a rule that puts additional

International Monetary Fund. Middle East and Central Asia Dept.

without proper oversight from fiscal authorities). Options for Saudi Arabia Fiscal Rules Key lessons in this section : A price smoothing rule may not be effective in achieving both objectives of preserving excessive volatility while creating adequate space for spending needs to meet diversification and growth objectives. An expenditure rule could provide adequate guidance, provided that it is anchored on a well-defined long-term anchor provided by the PIH. Under the baseline scenario a cap on real expenditure growth could be set to 1 ½ percent annually

International Monetary Fund. Fiscal Affairs Dept.

financial buffers. The price-smoothing rule , whereby only a share of revenue consistent with a reference price is spent (implicitly targeting a balanced budget over the medium term). This approach still involves significant volatility but would result in some degree of savings during a windfall. The modified PIH approach ( MPIH ), which assumes a temporary scaling up of public investment, results in significantly higher levels of financial savings and considerably more stable spending patterns. The precautionary version of the PIH approach (PPIH) results in

International Monetary Fund. Middle East and Central Asia Dept.

overall expenditure growth. Other countries (such as Mongolia) have used expenditure caps in combination with other fiscal anchors to smooth expenditure. Generating more predictable changes in spending could be particularly important for Mauritania if, for example, the Banda Gas project comes on stream and phosphate resources are developed (according to the extended scenario). Under the fiscal anchor of 1 percent structural resource surplus and a 5/1/5 price-smoothing rule, imposing an additional cap on real expenditure growth of 7 percent brings the level of financial