Managing (Fiscally) Resource Price Volatility: Exploring Policy Options for the Democratic Republic of Congo

40 Pages Posted: 7 Oct 2016

Date Written: September 27, 2016

Abstract

How should resource-dependent countries respond (fiscally) to resource price volatility? This paper studies what determines revenue allocation between a "spend today" strategy and a "save now-spend tomorrow" approach in the context of the Democratic Republic of Congo (DRC). It uses a three-sector model in which public infrastructure investment has tangible benefits for private production and investment while it is also subject to absorption constraints. The paper calibrates the optimal allocation rule between spending today and asset accumulation, by minimizing a social loss function defined in terms of household welfare (measured by consumption volatility) and macroeconomic volatility (measured in terms of fiscal volatility). Sensitivity analysis is also conducted with respect to various key parameters, including the efficiency of public investment. The results indicate that, if properly managed, sovereign fund could contribute significantly to macroeconomic stability in the DRC.

Suggested Citation

Moreira, Emmanuel Pinto, Managing (Fiscally) Resource Price Volatility: Exploring Policy Options for the Democratic Republic of Congo (September 27, 2016). World Bank Policy Research Working Paper No. 7837, Available at SSRN: https://ssrn.com/abstract=2849138

Emmanuel Pinto Moreira (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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