Policy implications in an environmental growth model with a generalized Hotelling depletion of non-renewable resources

We explore the role of fiscal policy in a growth model where the depletion of non-renewable resources presents stock effects. We first show that fiscal policy may induce the emergence of two coexisting steady states, one of which is characterized by a lower depletion rate and higher income (the virtuous steady state) than the other (the bad steady state). If returns to the cumulable inputs are high enough, the virtuous steady state is locally saddle-path stable, whereas the bad steady state is a non-saddle rest point. Therefore, depending on the size of returns, a continuum of equilibrium paths can emerge. Thus, it is important to calibrate the correct mix of policy instruments that may drive the economy to the virtuous steady state, and therefore escape a possible (low growth) poverty trap.