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Debt Sustainability, Public Investment, and Natural Resources in Developing Countries: the DIGNAR Model

Author/Editor: Giovanni Melina | Shu-Chun S. Yang | Luis-Felipe Zanna
Authorized for Distribution: March 31, 2014
Electronic Access: Free Full Text (PDF file size is 444KB)
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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: This paper presents the DIGNAR (Debt, Investment, Growth, and Natural Resources) model, which can be used to analyze the debt sustainability and macroeconomic effects of public investment plans in resource-abundant developing countries. DIGNAR is a dynamic, stochastic model of a small open economy. It has two types of households, including poor households with no access to financial markets, and features traded and nontraded sectors as well as a natural resource sector. Public capital enters production technologies, while public investment is subject to inefficiencies and absorptive capacity constraints. The government has access to different types of debt (concessional, domestic and external commercial) and a resource fund, which can be used to finance public investment plans. The resource fund can also serve as a buffer to absorb fiscal balances for given projections of resource revenues and public investment plans. When the fund is drawn down to its minimal value, a combination of external and domestic borrowing can be used to cover the fiscal gap in the short to medium run. Fiscal adjustments through tax rates and government non-capital expenditures—which may be constrained by ceilings and floors, respectively—are then triggered to maintain debt sustainability. The paper illustrates how the model can be particularly useful to assess debt sustainability in countries that borrow against future resource revenues to scale up public investment.
 
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Series: Working Paper No. 14/50
Subject(s): Public investment | Natural resources | Developing countries | Debt sustainability | Economic models
 
English  
    Published:   March 31, 2014        
    ISBN/ISSN:   9781475515459/1018-5941   Format:   Paper
    Stock No:   WPIEA2014050   Pages:   41
    Price:   US$18.00
       
     
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