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

Author/Editor: Leigh, Daniel | Olters, Jan-Peter
Authorized for Distribution: August 1, 2006
Electronic Access: Free Full Text (PDF file size is 485KB)
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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.
 
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Series: Working Paper No. 06/193
Subject(s): Fiscal policy | Gabon | Income | Investment | Natural resources | Economic models
Author's keyword(s): Sustainable fiscal policy | habit formation | permanent-income hypothesis | Gabon
 
English  
    Published:   August 1, 2006        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2006193   Pages:   30
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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