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

Author/Editor:

Daniel Leigh ; Jan-Peter Olters

Publication Date:

August 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 06/193

Subject:

English

Publication Date:

August 1, 2006

ISBN/ISSN:

9781451864533/1018-5941

Stock No:

WPIEA2006193

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

30

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