Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297881 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 2020-04
Publisher: 
Prague University of Economics and Business, Faculty of International Relations (FIR), Prague
Abstract: 
Recent studies have found that resource-rich low-income countries are better off investing their resource revenues domestically rather than saving them abroad in a sovereign wealth fund (SWF). This paper finds an optimal rule-based policy of accumulating public capital and its associated public investment path in a perfect foresight general equilibrium model. The model has several specific features different from the existing frameworks: The policy rule for public capital is introduced. Public investment is inefficient and has its absorptive capacity constraint costs. External savings clear the government budget. There is a variable share of resource revenues to accumulate the SWF, and the natural resource sector is assumed to be capital-intensive with its FDI shock. Based on calibration for African countries, the study finds that the front-loaded public investment path is optimal given an initial one-period resource windfall, public investment inefficiency, and absorptive capacity constraints in the economies. This result also holds under less productive public capital, while a scenario of no resource windfall produces the welfare loss due to a steady increase in consumption tax to finance public investment.
Subjects: 
public investment
public capital
absorptive capacity constraint
resource windfall
SWF
JEL: 
E22
E62
F41
H54
O55
Q32
Document Type: 
Working Paper

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