The fiscal rule: why the state sets part of its revenue aside
2 min · advanced
Automated material · TradeAlmanac editorial deskPrepared by a language model from our stored data and checked by an editor.
An economy with a large commodity export share earns income that jumps with world prices. If budget spending follows that income, the state spends a lot in a good year and has to cut sharply in a bad one — precisely when the economy needs support.
What the rule does
It fixes a baseline commodity price. Revenue above that level does not go into spending but into a reserve. If the price falls below the baseline, the reserve is drawn down.
The result: budget spending stops swinging with commodity prices.
Why it touches the exchange rate
Accumulating reserves means buying foreign currency; drawing them down means selling it. Those operations run regularly and are visible in the currency market.
The side effect turns out to be the main one for an investor: the rule weakens the link between commodity prices and the exchange rate. At a high price the surplus currency goes into the reserve instead of pushing the rouble up; at a low price the reserve is sold and softens the fall.
What happens when it is suspended
In periods when the rule is not in force, the link between the rate and commodity prices returns and swings get sharper. Such episodes have happened and are useful as a natural experiment showing what the mechanism contributes.
How to use it
Not to forecast the exchange rate — it is set by many factors at once: The balance of payments: where the rouble exchange rate comes from. But to understand why oil rose and the rouble did not: the answer is usually here rather than in "manipulation".
On the effect for exporters' shares: Exporters and the exchange rate: who gains from a weak rouble.
Prepared by a language model from our stored data and checked by an editor.
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