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Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy

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  • Jan-Peter Olters
  • Daniel Leigh

Abstract

While models based on Friedman''s (1957) permanent-income hypothesis can provide oilproducing countries with long-run fiscal targets, they usually abstract from short-run costs associated with consolidation. This paper proposes a model that takes such adjustment costs (or "habits") into account. Further operational realism is added by permitting differential interest rates on sovereign debt and financial assets. The approach is applied to Gabon, where oil reserves are expected to be exhausted in 30 years. The results suggest that Gabon''s current fiscal-policy stance cannot be maintained, while the presence of habits justifies smoothing the bulk of the adjustment toward the sustainable level over three to five years.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/193.

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Length: 30
Date of creation: 01 Aug 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/193

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Keywords: Natural resources; Economic models; fiscal policy; primary deficit; oil production; government spending; oil reserves; oil revenues; oil prices; fiscal policies; oil exporters; oil-producing countries; sustainable fiscal policy; fiscal adjustment; public debt; government expenditure; fiscal rules; fiscal consolidation; fiscal policy formulation; nonrenewable resources; budget constraint; fiscal sustainability; public spending; energy information administration; oil fields; oil production profile; fiscal deficit; capital expenditure; fiscal targets; fiscal balance; world oil prices; oil resources; public expenditure; sustainable fiscal deficit; oil sector; public finance; fiscal adjustments; fiscal deficits; petroleum prices; oil discoveries; crude price; fiscal framework; fiscal management; windfall oil revenues; oil producing; national oil; fiscal balances; fiscal vulnerability; fiscal stance; budget law; oil companies; budget constraints; excessive borrowing; natural gas; taxation; annual budget; fiscal strategy; fiscal affairs; tax revenues; fiscal crises; international oil prices; oil & gas; fiscal response; crude oil; fiscal data; fiscal revenue; fiscal surpluses; government expenditures; primary expenditure; quality of public spending; tax revenue; expenditure policy;

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References

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  1. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  2. Jeffrey D. Sachs & Andrew M. Warner, 1995. "Natural Resource Abundance and Economic Growth," NBER Working Papers 5398, National Bureau of Economic Research, Inc.
  3. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
  4. Joseph Ntamatungiro, 2004. "Fiscal Sustainability in Heavily Indebted Countries Dependenton Nonrenewable Resources," IMF Working Papers 04/30, International Monetary Fund.
  5. Halvor Mehlum & Karl Moene & Ragnar Torvik, 2002. "Institutions and the resource curse," Development and Comp Systems 0210003, EconWPA.
  6. Christopher Carroll, 2002. "'Risky Habits' and the Marginal Propensity to Consume Out Of Permanent Income," Computing in Economics and Finance 2002 42, Society for Computational Economics.
  7. Alonso Segura, 2006. "Management of Oil Wealth Under the Permanent Income Hypothesis," IMF Working Papers 06/183, International Monetary Fund.
  8. Jan-Peter OLTERS, 2004. "The Political Business Cycle At Sixty: Towards A Neo-Kaleckian Understanding Of Political Economy," Cahiers d’économie politique / Papers in Political Economy, L'Harmattan, issue 46, pages 91-130.
  9. John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
  10. Thomas Baunsgaard, 2003. "Fiscal Policy in Nigeria," IMF Working Papers 03/155, International Monetary Fund.
  11. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  12. Paul Collier & Jan Willem Gunning, 2005. "Asset Policies During an Oil Windfall: Some Simple Analytics," The World Economy, Wiley Blackwell, vol. 28(10), pages 1401-1415, October.
  13. Gunnar Tersman, 1991. "Oil, National Wealth, and Current and Future Consumption Possibilities," IMF Working Papers 91/60, International Monetary Fund.
  14. Carlos Leite & Jens Weidmann, 1999. "Does Mother Nature Corrupt," IMF Working Papers 99/85, International Monetary Fund.
  15. Velculescu Delia, 2004. "Intergenerational Habits, Fiscal Policy, and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-34, September.
  16. H. Takizawa & E. H. Gardner & Kenichi Ueda, 2004. "Are Developing Countries Better off Spending their Oil Wealth Upfront?," IMF Working Papers 04/141, International Monetary Fund.
  17. Ricardo Hausmann & Roberto Rigobon, 2003. "An Alternative Interpretation of the 'Resource Curse': Theory and Policy Implications," NBER Working Papers 9424, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Ilkin Sabiroglu & Samad Bashirli & Faiq Qasimli, 2011. "Creating a Favourable Deployment Mechanism of Oil and Gas Revenues with Regard to Volatile Oil Prices: The Case of Azerbaijan," Transition Studies Review, Springer, vol. 18(1), pages 179-199, September.
  2. Paul Collier & Rick Van Der Ploeg & Michael Spence & Anthony J Venables, 2010. "Managing Resource Revenues in Developing Economies," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 84-118, April.
  3. Christian B. Mulder & Amadou N. R. Sy & Yinqiu Lu & Udaibir S. Das, 2009. "Setting Up a Sovereign Wealth Fund," IMF Working Papers 09/179, International Monetary Fund.
  4. Alessandro Cologni & Matteo Manera, 2011. "Exogenous Oil Shocks, Fiscal Policy and Sector Reallocations in Oil Producing Countries," Working Papers 2011.55, Fondazione Eni Enrico Mattei.
  5. Terheggen, Anne, 2010. "The new kid in the forest: the impact of China's resource demand on Gabon's tropical timber value chain," MPRA Paper 37982, University Library of Munich, Germany.
  6. Daniel Leigh & Etibar Jafarov, 2007. "Alternative Fiscal Rules for Norway," IMF Working Papers 07/241, International Monetary Fund.
  7. Torfinn Harding & Frederick van der Ploeg, 2012. "Official forecasts and management of oil windfalls," Discussion Papers 676, Research Department of Statistics Norway.
  8. Udaibir S. Das & Yinqiu Lu & Michael G Papaioannou & Iva Petrova, 2012. "Sovereign Risk and Asset and Liability Management," IMF Working Papers 12/241, International Monetary Fund.
  9. Torfinn Harding & Frederick Van der Ploeg, 2009. "Is Norway's Bird-in-Hand Stabilization Fund Prudent Enough? Fiscal Reactions to Hydrocarbon Windfalls and Graying Populations," CESifo Working Paper Series 2830, CESifo Group Munich.
  10. Frederick Van der Ploeg & Anthony J. Venables, 2009. "Harnessing Windfall Revenues: Optimal Policies for Resource-Rich Developing Economies," CESifo Working Paper Series 2571, CESifo Group Munich.
  11. Djiofack, Calvin Z. & Omgba, Luc Désiré, 2011. "Oil depletion and development in Cameroon: A critical appraisal of the permanent income hypothesis," Energy Policy, Elsevier, vol. 39(11), pages 7202-7216.
  12. Stéphane Carcillo & Mauricio Villafuerte & Daniel Leigh, 2007. "Catch-Up Growth, Habits, Oil Depletion, and Fiscal Policy," IMF Working Papers 07/80, International Monetary Fund.
  13. Frederick van der Ploeg & Anthony J Venables, 2008. "Harnessing Windfall Revenues in Developing Economies: Sovereign wealth funds and optimal tradeoffs between citizen dividends, public infrastructure and debt reduction," OxCarre Working Papers 009, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  14. Alonso Segura, 2006. "Management of Oil Wealth Under the Permanent Income Hypothesis," IMF Working Papers 06/183, International Monetary Fund.
  15. Ludvig Söderling & Hanan Morsy & Martin Petri & Martin Hommes & Manal Fouad & Wojciech Maliszewski, 2007. "Public Debt and Fiscal Vulnerability in the Middle East," IMF Working Papers 07/12, International Monetary Fund.
  16. Jean-Luc Hélis & Teresa Dabán Sánchez, 2010. "A Public Financial Management Framework for Resources-Producing Countries," IMF Working Papers 10/72, International Monetary Fund.
  17. Wojciech Maliszewski, 2009. "Fiscal Policy Rules for Oil-Producing Countries," IMF Working Papers 09/126, International Monetary Fund.
  18. El Anshasy, Amany A. & Bradley, Michael D., 2012. "Oil prices and the fiscal policy response in oil-exporting countries," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 605-620.

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