Some Policy Lessons from Country Applications of the DIG and DIGNAR Models

IMF Working Papers, March 18, 2019

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Over the past seven years, the DIG and DIGNAR models have complemented the IMF and World Bank debt sustainability framework (DSF) analysis in over 65 country applications.
The models have informed program and surveillance work through qualitative and quantitative analysis of the macroeconomic effects of public investment scaling-ups.
The paper takes stock of model applications and extensions, and extracts five common policy lessons from the universe of country cases.
The paper also discusses how these models were used to estimate the quantitative macroeconomic effects associated with these lessons.

Improving public investment efficiency and/or raising the rate of return of public projects raises growth and lowers the risks associated with debt sustainability.
Prudent and gradual investment scaling-ups are preferable to aggressive front-loaded ones, in terms of private sector crowding-out effects, absorptive capacity constraints, and debt sustainability risks.
Domestic revenue mobilization helps create fiscal space for investment scaling-ups, by effectively containing public debt surges and their later-on repayments.
Aid smoothens fiscal adjustments associated with public investment increases and may lower the risks of unsustainable debt.
External savings mitigate Dutch disease macroeconomic effects and serve as fiscal buffers.

DIG and DIGNAR were applied in over 65 country cases to generate insights relevant for program design and surveillance.
The models provided both qualitative and quantitative estimates of the macroeconomic effects of public investment scaling-ups, including implications for growth, private sector crowding-out, absorptive capacity, and debt trajectories.
The paper documents how the models were used to estimate these quantitative macroeconomic effects associated with the five lessons.

Absorptive capacity, crowding in, crowding-out effect, Debt Sustainability, Developing Countries., DIGNAR model, efficiency parameter, Fiscal consolidation, investment efficiency, investment program, investment scaling-up, investment-growth nexus, Natural resources, public investment, Public investment spending, rate of return, scaling-up plan, Small Open DSGE Models, Sub-Saharan Africa, West Africa, WP

Daniel Gurara, Giovanni Melina, and Luis-Felipe Zanna (March 18, 2019) — IMF Working Paper No. 2019/062.