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Catch-Up Growth, Habits, Oil Depletion, and Fiscal Policy: Lessons from the Republic of Congo

Author/Editor: Carcillo, St├ęphane | Leigh, Daniel | Villafuerte, Mauricio
Authorized for Distribution: April 1, 2007
Electronic Access: Free Full Text (PDF file size is 348KB)
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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: In a number of oil producing countries, oil revenue accounts for the majority of government revenue, but is expected to be depleted in a relatively short time frame. Ensuring that fiscal policy is on a sustainable path is thus a high priority, but political and social adjustment costs create incentives to delay fiscal consolidation. This paper estimates how the permanently sustainable non-oil primary deficit (PSNOPD) depends on the speed of consolidation, using an optimization model with habit formation. Realism is added by allowing for negative growth-adjusted interest rates during a temporary period of catch-up growth. Applied to the Republic of Congo, this approach leads to the following conclusions: (i) the current fiscalpolicy stance is unsustainable; (ii) social adjustment costs justify spreading the bulk of the adjustment over five years; and (iii) the slower the adjustment, the lower the PSNOPD level.
 
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Series: Working Paper No. 07/80
Subject(s): Fiscal policy | Congo, Republic of | Economic growth | Oil revenues | Adjustment process | Social policy
Author's keyword(s): Sustainable fiscal policy | habit formation | permanent-income hypothesis | catch-up growth | oil | Republic of Congo
 
English  
    Published:   April 1, 2007        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2007080   Pages:   28
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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