Fiscal Reaction function of Government into Oil Price Shocks

According to state of the economy and single product much government spending is financed from oil revenues. Since the changes in oil prices stems from exogenous developments and economic authorities outside of the control of oil revenues is also a great deal of volatility. These fluctuations can have a variety of consequences.In a dynamic general equilibrium framework, this paper attempts to drive a fiscal policy reaction function (in term of government expenditure). The data are analyzed in this study - which is for the period 1969-2018 and annual basis. I study the fiscal implications of (a) the anticipated change oil price, (b) the growing volatility of oil price, (c) the observed positively skewed oil price. The result show that a robust positive long run effect of favorable oil price shocks. Also, the asymmetry of oil price shocks is to reduce the growth of government spending.The most important policy advice of this article is that policymakers, using the successful experiences of other oil countries, to establish an institution such as a savings and investment fund, to prevent direct shocks to the domestic economy and the negative effects of oil price instability. Reduce GDP and government revenues.