Oil Booms and Their Impact Through Fiscal Policy

This paper explores how oil price shocks a ect scal policy and macroeconomic performance in an oil exporting small open economy. In this type of economy, oil price shocks in uence scal policy because they have nontrivial e ects on the government's budget constraint. On one hand, oil price shocks a ect revenue directly as oil revenue constitutes a large share of total revenue. On the other hand, oil shocks generate wealth e ects that alter relative prices. Analyzing Mexican data I nd that typical positive oil price shocks generate signi cant temporary increases in government purchases, tradable and nontradable output and private consumption. Additionally, they also generate a temporary appreciation of the real exchange rate. I use a two-sector small open economy DSGE model with production in the tradable and nontradable sectors, exible prices and distribution costs and I nd that the model is capable of replicating the features found in the data. JEL classi cations: E32, E62, H30