Using the Oil Revenues: A Long Run Perspective

Abstract

This paper discusses the long run macroeconomic planning problems of a small, open economy earning an resource rent. A two-sector optimal growth model for Norway is introduced, in which the planning objective is to maximize the sum of discounted utility of consumption. The model is solved using standard dynamic optimization techniques, and the properties of the optimal growth paths are discussed. A special emphasis is placed on optimal consumption and balance of payments policies in a small open economy, and the role of the real exchange rate.

A numerical version of the model, with coefficients estimated on Norwegian data, has been implemented. This version is solved for a base run, using official projections of oil and gas revenues as input. Impact calculations are performed on the numerical model to analyze two questions: How should optimal policies be adjusted to an exogenous increase in oil revenues appearing in the distant future? Secondly, how should optimal policies be adjusted if there somehow are institutional constraints on the development of the balance of payments?