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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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  1. 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.
  2. Mehlum, Halvor & Moene, Karl-Ove & Torvik, Ragnar, 2003. "Institutions and the resource curse," Memorandum 29/2002, Oslo University, Department of Economics.
  3. Jeffrey D. Sachs & Andrew M. Warner, 1995. "Natural Resource Abundance and Economic Growth," NBER Working Papers 5398, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. Carlos Leite & Jens Weidmann, 1999. "Does Mother Nature Corrupt; Natural Resources, Corruption, and Economic Growth," IMF Working Papers 99/85, International Monetary Fund.
  7. Velculescu Delia, 2004. "Intergenerational Habits, Fiscal Policy, and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-34, September.
  8. 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.
  9. 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.
  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.
  11. 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.
  12. Gunnar Tersman, 1991. "Oil, National Wealth, and Current and Future Consumption Possibilities," IMF Working Papers 91/60, International Monetary Fund.
  13. Thomas Baunsgaard, 2003. "Fiscal Policy in Nigeria; Any Role for Rules?," IMF Working Papers 03/155, International Monetary Fund.
  14. 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.
  15. 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.
  16. 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.
  17. Joseph Ntamatungiro, 2004. "Fiscal Sustainability in Heavily Indebted Countries Dependenton Nonrenewable Resources; The Case of Gabon," IMF Working Papers 04/30, International Monetary Fund.
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