Debt Sustainability, Public Investment, and Natural Resources in Developing Countries: the DIGNAR Model
IMF Working Papers, March 31, 2014
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- Debt Sustainability, Public Investment, and Natural Resources in Developing Countries: the DIGNAR Model
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Bibliographic details
- Authors: Giovanni Melina, Susan S. Yang, Luis-Felipe Zanna
- Published: March 31, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475515459.001
Model overview
- DIGNAR (Debt, Investment, Growth, and Natural Resources) is a dynamic, stochastic model of a small open economy designed to analyze debt sustainability and macroeconomic effects of public investment plans in resource-abundant developing countries.
- The model is useful to assess debt sustainability in countries that borrow against future resource revenues to scale up public investment.
Key structural features
- Households:
- Two types of households, including poor households with no access to financial markets.
- Sectors:
- Traded sector.
- Nontraded sector.
- Natural resource sector.
- Public capital and investment:
- Public capital enters production technologies.
- Public investment is subject to inefficiencies and absorptive capacity constraints.
- Government instruments and institutions:
- Access to different types of debt: concessional, domestic, and external commercial.
- A resource fund that:
- Can be used to finance public investment plans.
- Can serve as a buffer to absorb fiscal balances for given projections of resource revenues and public investment plans.
- When the resource 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 are triggered to maintain debt sustainability.
- Government non-capital expenditures may be constrained by ceilings and floors, respectively.
Analytical mechanisms and dynamics
- Stochastic dynamics capture uncertainty in resource revenues and macroeconomic variables.
- Interaction between public investment scaling and borrowing against future resource revenues determines debt trajectories and macroeconomic outcomes.
- Absorptive capacity constraints and investment inefficiencies modulate the effectiveness of scaled-up public investment.
Primary uses and applications
- Assess debt sustainability under public investment scaling financed by resource revenues.
- Evaluate macroeconomic effects of different financing mixes (concessional, domestic, external commercial).
- Test the role of a resource fund as a buffer accommodating volatile resource revenues and planned investment paths.
- Explore fiscal adjustment triggers (tax rates and non-capital spending) necessary to maintain debt sustainability when buffers are exhausted.
Subject areas and keywords (as provided)
- Subjects: Commercial borrowing, Consumption taxes, Environment, Expenditure, External debt, Natural resources, Public debt, Public investment spending, Taxes
- Keywords: Africa, Commercial borrowing, Consumption taxes, Debt Sustainability, Developing Countries, DIGNAR, investment adjustment cost parameter, investment approach, investment efficiency, investment path, investment scaling-up path, natural resource, Natural resources, Public Investment, Public investment spending, resource revenue, scaling-up investment target, Small Open DSGE Models, Sub-Saharan Africa, WP
Giovanni Melina, Susan S. Yang, and Luis-Felipe Zanna — IMF Working Paper, March 31, 2014.