| This dissertation consists of two chapters which address the role of fiscal policy in oil-rich small open economies. The first chapter, entitled "Oil Booms and Their Impact Through Fiscal Policy", analyzes how oil price shocks affect macroeconomic activity in an oil exporting small open economy. I find that fiscal policy is a key transmission mechanism, in that it largely determines the degree of exposure of the domestic economy to this type of shock. I assess the relevance of fiscal policy as a propagation mechanism by analyzing data for Mexico and Norway, two oil-rich countries with very different fundamentals. I find that in Mexico, an oil price shock generates significant temporary increases in government purchases, tradable and nontradable output and private consumption, as well as a temporary appreciation of the real exchange rate. In Norway, however, the oil shock does not generate significant responses for these variables, despite a significant increase in oil revenue. Arguably, the difference lies in the way fiscal policy is conducted. I develop a two-sector small open economy dynamic stochastic general equilibrium model with production in the tradable and nontradable sectors and I find that taking each country's fiscal policy response to the oil shock to be the one observed in the data, the model is able to match the data responses of output, consumption and the real exchange rate for both countries. Absent the fiscal policy responses, the model cannot explain the data, suggesting that the fiscal channel is the key transmission mechanism of oil price shocks.;The second chapter, entitled "Implementable Fiscal Rules for an Oil-Exporting Small Open Economy Facing Depletion" analyzes implementable fiscal rules for a small open economy whose treasury is dependent on oil revenues and whose oil sector is shrinking. I consider a dynamic stochastic general equilibrium model with production in the oil and non oil sector and I analyze the effects of implementing alternative sustainable fiscal rules in the context of a deteriorating oil sector. I assess the policy's performance in terms of conditional and unconditional welfare. I show that rules that finance government purchases with structural revenue are preferred only if government purchases do not enter the utility function. Otherwise, when government purchases are complements with private consumption, depletion makes rules that finance government purchases with current revenue more attractive. Furthermore, the lower the sustainable level of oil extraction, the harder it is to reject a rule that finances government purchases with current oil revenue. |
