SUSTAINABLE CONSTANT CONSUMPTION IN A SEMI‐OPEN ECONOMY WITH EXHAUSTIBLE RESOURCES*

Ryuhei Okumura and Dapeng Cai

The Japanese Economic Review, 2007, vol. 58, issue 2, 226-237

Abstract: To sustain constant consumption, Hartwick's rule prescribes reinvesting all resource rents in reproducible capital. However, Hartwick's rule is not necessarily the result of optimization. In this paper, we address this insufficiency by deriving a constant consumption path endogenously in a semi‐open economy with an exhaustible resource, which has full access to world goods and capital markets, while the resource flows are not internationally tradable. Our findings show that, due to the essentiality of both capital and resource to the production process, the economy transforms its domestic assets into foreign ones, consuming a constant interest flow from the latter.

Date: 2007
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