Oil and Government Expenditures: The Short Run Versus the Long Run Effect

Abstract

Dependency on oil rents (the difference between oil revenue and production cost) may not be sustainable over the short or the long run for oil dependent countries. Oil rents fluctuate with the oil price which is known for being volatile. Hence, more oil-dependent states may experience more volatile government expenditures. However, it is not sure if oil rents have a positive or a negative effect on government expenditures. In this paper, we try to identify short and a long run relationship between oil rents and government expenditures between 99 oilproducing countries from 1967 to 2015. We compare two models that assume different relationships between the countries we analyze. One being a similar long-run effect for all countries, and the other allowing for heterogeneity across countries. Our results indicate that there exists a robust short-run relationship for both models. The most robust results indicate a positive short-run relationship between the growth rate of oil rents and the growth rate of government expenditures. There is weak evidence for a long-run relationship between oil rents and government expenditures.