Journal Article

The Short-run Impact of Oil Windfalls in Low-income Countries: A DSGE Approach

Jihad Dagher, Jan Gottschalk and Rafael Portillo

in Journal of African Economies

Volume 21, issue 3, pages 343-372
Published in print June 2012 | ISSN: 0963-8024
Published online March 2012 | e-ISSN: 1464-3723 | DOI: https://dx.doi.org/10.1093/jae/ejr052
The Short-run Impact of Oil Windfalls in Low-income Countries: A DSGE Approach

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  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • Macroeconomic Aspects of International Trade and Finance

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We use a multi-sector dynamic stochastic general equilibrium (DSGE) model—calibrated to the Ghanaian economy—to analyse the short-term impact of oil windfalls in low-income countries (LICs) and the role of various fiscal and monetary policy responses. The model includes limited access to international capital markets, limited participation by residents in the domestic financial system and limited labour mobility across sectors, features that are pervasive in these countries. Relative to developed countries, oil windfalls are likely to have larger aggregate demand pressures. A policy of fiscal smoothing—associated with a sovereign wealth fund—can help achieve macroeconomic stability and improve welfare. On the other hand, accumulation of reserves in response to the windfall—without fiscal backing—can crowd out the private sector and reduce welfare. These findings highlight the importance of policy coordination for the macroeconomic effects of oil proceeds in LICs.

Keywords: E20; E62; E63; F41

Journal Article.  7435 words.  Illustrated.

Subjects: Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; Macroeconomic Aspects of International Trade and Finance

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