Monetary and fiscal policy interactions in resource-rich emerging economies

Abstract

ABSTRACT This paper investigates monetary-fiscal interactions in resource-rich emerging economies using an estimated Dynamic Stochastic General Equilibrium model. We find evidence of an active monetary and passive fiscal policy but confirm the presence of revenue substitution; a phenomenon that alters the automatic stabilizer’s role of fiscal policy. Once the response of fiscal policy to oil-related flows is muted, the revenue substitution effect is neutralized, taxes respond positively to debt, and the stagflationary impacts of negative oil price shocks are ameliorated. Our findings highlight the need for dynamic tax policies that are less sensitive to receipts from resource rent as a strategy for achieving debt sustainability and overall macroeconomic stability in resource-rich countries.