Annex I: Solving the Model
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International Monetary Fund, 2004b, “Debt Sustainability in Low-Income Countries—Further Considerations on an Operational Framework and Policy Implications,” available at http://www.imf.org/external/np/pdr/sustain/2004/091004.htm
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The authors are grateful to Lorenzo L. Pérez, Shuang Ding, Hajime Takizawa, Koba Gvenetadze, Valeria Fichera, Kenich Ueda, and Mayra Zermeño for their helpful comments and supports.
Excluding oil and gas transportation.
This paper is based on the information available as of September 2007.
In this model, raising the lump-sum tax or issuing government bonds has the same effect on the economy—thus the Ricardian equivalence holds.
By the transition equation, private capital accumulation is equal to real private investment minus capital depreciation.
Nominal returns on foreign assets and liabilities vary in line with a given world real interest rate and the movement of the inflation and exchange rates. The level of world real interest rate is consistent with the model’s steady state conditions.
It is expected that oil production will end in 2024 in the absence of new discoveries.
This debt threshold is in line with indicative sustainability thresholds suggested in IMF 2004a, 2004b, and 2006, where the debt sustainability threshold ranges between 30–60 percent in terms of the net present value of debt to GDP, depending on the strength of the policy framework.
The labor share is estimated by the sum of employees in each non-oil sector (excluding social services) multiplied by the average wage in that sector, and then divided by non-oil GDP.
Our estimate of the TFP (denoted as A) growth for 1995–2006 in Azerbaijan is about 0.04. This implies that the growth rate of labor-augmented technological progress (z) is about 0.03, given the calibrated parameter values for θ and α and the paths of Kg and L.
Oil production is exogenous.
Here, only domestic interest rates are endogenous.