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AbstractNatural resource revenues are an important financing source for public investment in many developing economies. Investing volatile resource revenues, however, may subject an economy to macroeconomic instability. This paper studies fiscal approaches to investing resource revenues, using Angola as an example. With spend‐as‐you‐go, resource revenues are spent as received, resulting in little external saving; public investment can be interrupted, driving up the capital depreciation rate and undermining stability. Gradual scaling‐up, instead, allows countries to build up external saving to shield investment from revenue volatility. The framework adopted here can be used as a planning tool to define a medium‐term fiscal strategy.

Cover -- Table of Contents -- 1. Introduction -- 2. Model Setup -- 2.1 Households -- 2.1.1 Savers -- 2.1.2 Hand-to-Mouth Households -- 2.2 Firms -- 2.2.1 Non-Traded Goods Sector -- 2.2.2 Traded Goods Sector -- 2.3 The Public Sector -- 2.4 Aggregation and Market Clearing -- 3. Solution and Calibration -- 4. Analysis -- 4.1 Optimal Spending and Reserve Accumulation Policies -- 4.1.1 The Spending of Aid Inflows -- 4.1.2 The Role of Reserve Accumulation -- 4.2 Optimal Share of Public Investment -- 5. Conclusion -- Tables -- Table 1. Baseline Calibration -- Table 2. Welfare changes of different fiscal spending and reserve accumulation policies -- Table 3. Welfare changes of different shares of public investment in total government expenditures -- Figures -- Figure 1. Impulse responses of aggregate variables for varying degrees of spending of aid, under full absorption -- Figure 2. Impulse responses of household-specific variables for varying degrees of spending of aid, under full absorption -- Figure 3. Impulse responses of aggregate variables for varying degrees of absorption (reserves accumulation) of aid, under immediate spending -- Figure 4. Impulse responses of household-specific variables for varying degrees of absorption (reserves accumulation) of aid, under immediate spending -- Figure 5. Impulse responses of aggregate variables for different shares of public investment in total government expenditures -- Figure 6. Impulse responses of household-specific variables for different shares of public investment in total government expenditures -- Figure 7. Volatility of selected variables for: (i) different degrees of spending of aid, given full absorption and (ii) varying degrees of absorption given immediate spending.

This paper presents the DIGNAR (Debt, Investment, Growth, and Natural Resources) model, which can be used to analyze the debt sustainability and macroeconomic effects of public investment plans in resource-abundant developing countries. DIGNAR is a dynamic, stochastic model of a small open economy. It has two types of households, including poor households with no access to financial markets, and features traded and nontraded sectors as well as a natural resource sector. Public capital enters production technologies, while public investment is subject to inefficiencies and absorptive capacity c