NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are Windfalls a Curse? A Non-Representative Agent Model of the Current Account and Fiscal Policy

Aaron Tornell, Philip Lane

NBER Working Paper No. 4839 (Also Reprint No. r2200)
Issued in August 1994
NBER Program(s):   IFM

In several countries temporary terms of trade improvements have led to a deterioration of the current account. Furthermore, many of these countries failed to attain greater post-boom growth rates. The point we make is that the structure of the fiscal process is critical in determining outcomes. If fiscal control is unitary, then the consumption-smoothing effect is operative, and representative-agent models of the current account have predictive power. However, if control is divided among several fiscal claimants, a voracity effect appears which counteracts the consumption-smoothing effect, leading to a deterioration of the current account in response to a positive shock. We model the interaction among fiscal claimants as a dynamic game, and show that in equilibrium aggregate appropriation increases more than the windfall itself. This results in a deterioration of the current account. We also show that all the windfall is dissipated, with the country experiencing no increase in its growth rate. Lastly, we analyze the experiences of seven countries which have enjoyed large windfalls.

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Document Object Identifier (DOI): 10.3386/w4839

Published: Journal of International Economics, vol. 44, pp. 83-112, 1998,

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