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Federal Reserve Bank of Dallas
Working Papers
The long–run macroeconomic impacts of fuel subsidies
Michael D. Plante
Abstract

Many developing and emerging market countries have subsidies on fuel products. Using a small open economy model with a non-traded sector I show how these subsidies impact the steady state levels of macroeconomic aggregates such as consumption, labor supply, and aggregate welfare. These subsidies can lead to crowding out of non-oil consumption, inefficient inter-sectoral allocations of labor, and other distortions in macroeconomic variables. Across steady states aggregate welfare is reduced by these subsidies. This result holds for a country with no oil production and for a net exporter of oil. The distortions in relative prices introduced by the subsidy create most of the welfare losses. How the subsidy is financed is of secondary importance. Aggregate welfare is significantly higher if the subsidies are replaced by lump-sum transfers of equal value.


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Michael D. Plante, The long–run macroeconomic impacts of fuel subsidies, Federal Reserve Bank of Dallas, Working Papers 1303, 2013.
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Note: Published as: Plante, Michael (2014), "The Long–run Macroeconomic Impacts of Fuel Subsidies," Journal of Development Economics 107: 129-143.
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Keywords: Fiscal; policy
DOI: 10.24149/wp1303
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