Fiscal policy rules for managing oil revenues in Nigeria

Next, assume that the deterministic component of the growth adjusted mean
real interest rate r(d t ) is an increasing function of the debt to GDP ratio. 12
t
( d t
r = r ) with r ’ (d t )>0, (8)
where r ’ (d t ) represents the first derivative of r(d t )
Combining (6), (7) and (8), we obtain,
d
( 1+
r( d
t
) +
t
)( dt
− pst
)
1
=
, (9)
t+ ε
where d t denotes debt to GDP ratio at the beginning of period t, and ps t denotes
the ratio of primary surplus to GDP in period t. It is assume that growth
adjusted mean real interest rate, r(d t ) is an increasing function of the debt to
GDP ratio.
Since the analysis here is limited to a developing country, like Nigeria, a linear
function of debt stock is assumed, for simplicity. 13
r
( d t
) ρdt
= For all t, (10)
where 0 < ρ