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

30 Pages Posted: 3 Oct 2006

See all articles by Daniel Leigh

Daniel Leigh

Johns Hopkins University

Jan-Peter Olters

International Monetary Fund (IMF)

Date Written: August 2006

Abstract

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.

Keywords: Sustainable fiscal policy, habit formation, permanent-income hypothesis, Gabon

JEL Classification: E6, H5, Q3

Suggested Citation

Leigh, Daniel and Olters, Jan-Peter, Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy: Lessons from Gabon (August 2006). IMF Working Paper No. 06/193, Available at SSRN: https://ssrn.com/abstract=934452

Daniel Leigh

Johns Hopkins University

Baltimore, MD 21218
United States

Jan-Peter Olters (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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