The Value of Fiscal Discipline for Oil-Exporting Countries

I analyze how oil price shocks affect macroeconomic activity in an oil-exporting small open economy using a dynamic stochastic general equilibrium model. I show that fiscal policy is a key transmission channel that affects the degree of exposure to oil shocks. I assess the relevance of fiscal policy as a propagation mechanism by analyzing data for Mexico and Norway, two oil-exporting countries with different fiscal frameworks. Taking fiscal policy as given by the data, the model can successfully explain the responses of output, consumption and the relative price of nontradable goods for each country. Furthermore, the model is unable to explain these