Title: Are oil windfalls a blessing or a curse? Policy exercises with an Indonesia - like model
Abstract: The value of large, unpredictable terms-of-trade gains to mineral exporting countries has been much debated. This paper uses a computable general equilibrium model of an Indonesia-like economy to assess the 'value' of oil windfalls over a 20-year horizon. The model is simulated and optimized subject to a variety of assumptions on macroeconomic clearing, institutional constraints on economic policy and the ability to predict the world oil market. The results indicate the critical importance of policy in determining the realized value of windfall gains. The possibility of capital flight, spurred on by restrictive domestic financial policies and anticipation of the need to realign the real exchange rate when oil revenues fall shortens the adjustment period and can involve heavy cost if fiscal policy is not stabilizing. Overoptimistic predictions of future oil revenues are shown to have seriously adverse consequences, particularly if the non-oil economy adjusts to falling demand through underemployment and capital flight is provoked. Overall, the results indicate a large downside risk attached to reversible terms of trade gains.
Publication Year: 1985
Publication Date: 1985-11-01
Language: en
Type: book
Access and Citation
Cited By Count: 11
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot