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

30 Pages Posted: 12 Apr 2007

See all articles by Stéphane Carcillo

Stéphane Carcillo

Organisation for Economic Co-operation and Development (OECD); Sciences Po; IZA

Daniel Leigh

International Monetary Fund (IMF)

Mauricio Villafuerte

International Monetary Fund (IMF)

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

Carcillo, Stephane and Leigh, Daniel and Villafuerte, Mauricio, Catch-Up Growth, Habits, Oil Depletion, and Fiscal Policy: Lessons from the Republic of Congo (April 2007). IMF Working Papers, Vol. , pp. 1-28, 2007. Available at SSRN: https://ssrn.com/abstract=979034

Stephane Carcillo (Contact Author)

Organisation for Economic Co-operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Sciences Po ( email )

28 rue des Saints peres
Paris, 75007
France

IZA ( email )

Daniel Leigh

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Mauricio Villafuerte

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
95
Abstract Views
713
rank
278,460
PlumX Metrics