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

_IMF Working Papers, March 31, 2014_

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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

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### 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/debt-sustainability-public-investment-and-natural-resources-in-developing-countries-the-41455_