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

  • Stéphane Carcillo
  • Mauricio Villafuerte
  • Daniel Leigh

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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/80.

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Length: 28
Date of creation: 01 Apr 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/80
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  1. repec:imf:imfwpa:91/60 is not listed on IDEAS
  2. Xavier Sala-i-Martín & Arvind Subramanian, 2003. "Addressing the natural resource curse: An illustration from Nigeria," Economics Working Papers 685, Department of Economics and Business, Universitat Pompeu Fabra.
  3. repec:imf:imfwpa:06/185 is not listed on IDEAS
  4. H. Takizawa & E. H. Gardner & Kenichi Ueda, 2004. "Are Developing Countries Better off Spending their Oil Wealth Upfront?," IMF Working Papers 04/141, International Monetary Fund.
  5. Jan-Peter Olters & Daniel Leigh, 2006. "Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy: Lessons From Gabon," IMF Working Papers 06/193, International Monetary Fund.
  6. Christopher Carroll, 2002. "'Risky Habits' and the Marginal Propensity to Consume Out Of Permanent Income," Computing in Economics and Finance 2002 42, Society for Computational Economics.
  7. Oya Celasun & Xavier Debrun & Jonathan D. Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 3.
  8. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  9. Alonso Segura, 2006. "Management of Oil Wealth Under the Permanent Income Hypothesis: The Case of Sao tome and Principe," IMF Working Papers 06/183, International Monetary Fund.
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