966
Serial number: 01/2014
Author(s): S.Huseynov, V.Ahmadov
Language: English
Date: 2014
Abstract: In this paper, we base our policy analyses and simulations on three different specifications of a DSGE model developed for an oil rich country and check the impact of the oil windfalls. The first proposed specification is a classical one with a Taylor rule and the second one is a recently new specification with a money growth rule. Beside two familiar specifications, we propose a new specification which introduces money market equilibrium issues in the short run. We show that all three specifications allow the fiscal authority to act as the main actor in propagating and amplifying the effects of the oil price shocks to the rest of the economy. When an oil shock hits the economy, its first round effect operates through oil fund transfers to the budget. The second round effects result from an increase in government consumption and government investment expenditures, which augments public capital affecting total factor productivity (TFP) and production, as well as the aggregate demand. We also find that despite significant differences, all three specifications demonstrate similar response dynamics.
Key words: Fiscal policy; Oil windfalls; Public investment; Market disequilibrium; Oil rich country
JEL classification: E35, E47, E58, E61
