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Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy: Lessons from Gabon

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Author Info
Daniel Leigh
Jan-Peter Olters

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

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Length: 30 pages
Date of creation: 05 Sep 2006
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Handle: RePEc:imf:imfwpa:06/193

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Related research
Keywords: Sustainable fiscal policy ; habit formation ; permanent-income hypothesis ; Gabon ; Fiscal policy ; Gabon ; Income ; Investment ; Economic models ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
    Other versions:
  2. Sachs, J-D & Warner, A-M, 1995. "Natural Resource Abundance and Economic Growth," Papers 517a, Harvard - Institute for International Development.
  3. Carlos Leite & Jens Weidmann, 1999. "Does Mother Nature Corrupt - Natural Resources, Corruption, and Economic Growth," IMF Working Papers 99/85, International Monetary Fund.
  4. Joseph Ntamatungiro, 2004. "Fiscal Sustainability in Heavily Indebted Countries Dependent on Nonrenewable Resources: The Case of Gabon," IMF Working Papers 04/30, International Monetary Fund. [Downloadable!]
  5. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Thomas Baunsgaard, 2003. "Fiscal Policy in Nigeria: Any Role for Rules?," IMF Working Papers 03/155, International Monetary Fund. [Downloadable!]
  8. Jeffrey D. Sachs & Andrew M. Warner, 1995. "Natural Resource Abundance and Economic Growth," NBER Working Papers 5398, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Alonso Segura, 2006. "Management of Oil Wealth Under the Permanent Income Hypothesis: The Case of Sao Tome and Principe," IMF Working Papers 06/183, International Monetary Fund. [Downloadable!]
  10. 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. [Downloadable!] (restricted)
  11. Paul Collier & Jan Willem Gunning, 2005. "Asset Policies During an Oil Windfall: Some Simple Analytics," The World Economy, Blackwell Publishing, vol. 28(10), pages 1401-1415, October. [Downloadable!] (restricted)
  12. 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.
  13. Halvor Mehlum & Karl Moene & Ragnar Torvik, 2006. "Institutions and the Resource Curse," Economic Journal, Royal Economic Society, vol. 116(508), pages 1-20, 01. [Downloadable!] (restricted)
    Other versions:
  14. repec:bep:mactop:v:4:y:2004:i:1:p:1129-1129 is not listed on IDEAS
  15. Gunnar Tersman, 1991. "Oil, National Wealth, and Current and Future Consumption Possibilities," IMF Working Papers 91/60, International Monetary Fund.
  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. [Downloadable!]
  17. 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. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. van der Ploeg, Frederick & Venables, Anthony J., 2008. "Harnessing Windfall Revenues in Developing Economies: Sovereign Wealth Funds and Optimal Tradeoffs Between Citizen Dividends, Public Infrastructure and Debt Reduction," CEPR Discussion Papers 6954, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Yinqiu Lu & Udaibir S. Das & Christian B. Mulder & Amadou N. R. Sy, 2009. "Setting up a Sovereign Wealth Fund: Some Policy and Operational Considerations," IMF Working Papers 09/179, International Monetary Fund. [Downloadable!]
  3. Alonso Segura, 2006. "Management of Oil Wealth Under the Permanent Income Hypothesis: The Case of Sao Tome and Principe," IMF Working Papers 06/183, International Monetary Fund. [Downloadable!]
  4. Daniel Leigh & Etibar Jafarov, 2007. "Alternative Fiscal Rules for Norway," IMF Working Papers 07/241, International Monetary Fund. [Downloadable!]
  5. Martin Petri & Ludvig Söderling & Wojciech Maliszewski & Hanan Morsy & Manal Fouad & Martin Hommes, 2007. "Public Debt and Fiscal Vulnerability in the Middle East," IMF Working Papers 07/12, International Monetary Fund. [Downloadable!]
  6. Frederick Van der Ploeg & Anthony J. Venables, 2009. "Harnessing Windfall Revenues: Optimal Policies for Resource-Rich Developing Economies," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Daniel Leigh & Stéphane Carcillo & Mauricio Villafuerte, 2007. "Catch-Up Growth, Habits, Oil Depletion, and Fiscal Policy: Lessons from the Republic of Congo," IMF Working Papers 07/80, International Monetary Fund. [Downloadable!]
  8. Wojciech Maliszewski, 2009. "Fiscal Policy Rules for Oil-Producing Countries: A Welfare-Based Assessment," IMF Working Papers 09/126, International Monetary Fund. [Downloadable!]
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