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

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Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy : Lessons from Gabon
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Volume/Issue:
2006/193
Series:
IMF Working Papers
Author(s):
Jan-Peter Olters, and Daniel Leigh
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
August 2006
DOI:
http://dx.doi.org/10.5089/9781451864533.001
ISBN:
9781451864533
ISSN:
1018-5941
Page:
30
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.

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

Author(s):
Jan-Peter Olters, and Daniel Leigh
Published Date:
August 2006
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