Catch-Up Growth, Habits, Oil Depletion, and Fiscal Policy: Lessons from the Republic of Congo
30 Pages Posted: 12 Apr 2007
Date Written: April 2007
Abstract
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 fiscal-policy 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.
JEL Classification: E6, H5, Q3
Suggested Citation: Suggested Citation
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