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Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy; Lessons From Gabon

  • Jan-Peter Olters
  • Daniel Leigh

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
Date of creation: 01 Aug 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/193
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  2. Carlos Leite & Jens Weidmann, 1999. "Does Mother Nature Corrupt; Natural Resources, Corruption, and Economic Growth," IMF Working Papers 99/85, International Monetary Fund.
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  9. Thomas Baunsgaard, 2003. "Fiscal Policy in Nigeria; Any Role for Rules?," IMF Working Papers 03/155, International Monetary Fund.
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  14. 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.
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