OPTIMAL SIMPLE FISCAL RULES 14 Algerian non-resource GDP and Trinidad & Tobago’s SWF is about 28% non-resource GDP (data from the SWF Institute), so we set _Ass_ = 0 _._ 3 as an intermediate value. We assume steady state transfers are set to pay out all steady state revenues. The persistence and volatility of non-resource GDP is taken from estimating an AR(1) process on HP-filtered log real per capita GDP (from the World Development Indicators). While it is true that HP filtering removes much of the persistence in log GDP by constructtion, this is necessary given log GDP per capita is close to a random walk, and this is a standard procedure in the literature.

# 4. Main Numerical Results

Table 2 summarizes the main results for optimal and classical rules.

**HtM Stabilization: smoothing vs insurance** In the first column of Table 2, the government follows a rule which provides full insurance for the HtM household against non-resource and commodity price shocks. As a result, HtM household consumption remains constant at its steady state level (a welfare loss of zero for that HH), which is the same result we would get if the household had access to state-contingent Arrow-Debreu securities. Given the HtM HHs lack access to financial markets, one might think this policy is similar to government borrowing/saving on behalf of the HtM household as it “fixes” market incompleteness.

However, from an aggregate perspective this rule is very inefficient because it concentrates risk with the Ricardian HH rather than sharing risk across households. In fact, the HtM household full stabilization rule has the worst aggregate welfare performance among the 7 rules considered in this section (a 4.9% of SS consumption welfare loss, _each period_ ). The full HtM stabilization rule leads to a very large consumption variance for the Ricardian HH (SD of 31% annually). This — is the difference between smoothing vs insurance the Ricardian HH and government have the financial technology to _smooth_ out anticipated changes in the time path of income, but persistent commodity price shocks also lead to large changes in the _present value_ of future income, which is _uninsurable_ for both Ricardian HHs and the government. Note that because _θa_<sup>_′′_= 0, our Ricardian</sup> Equivalence result (Lemma 2) applies and the government and Ricardian HH act like one entity (we get the same allocation for _any_ feasible combination of _{θa_<sup>_′, θ_</sup> _y_<sup>_′, θ_</sup> _p_<sup>_′}_).</sup>

**BBR outperforms SSR** Columns 2 and 3 of Table 2 show an interesting and unexpected result: the BBR outperforms SSR. From the results of the literature summarized in the introduction, one would expect the opposite. Moreover, the difference in welfare is quite sizable: the welfare loss is 13% lower under BBR than under SSR. As argued in Section 2, when shocks are persistent, the SSR _over-saves_ windfall revenues (and _overspends_ when commodity prices are low), which means that in the short term, consumption of the HtM HH under-responds to changes in commodity prices.

A related problem is that SSR leads to a very large standard deviation of assets, both public and private. In our model, the main problem this creates is that the rate of return earned on the SWF assets will decrease as the SWF increases in size (“beating the market” is hard for large funds), or alternatively the interest rate increases when the SWF is small (fixed management