# 2. The macro-econometric model MFMod-TCD

In order to design and assess alternative oil revenue management mechanisms, this paper uses the macrostructural model The Macroeconomic and Fiscal Model for Chad (MFMod-TCD). MFMod-TCD is a countryspecific structural econometric model of the Chadian economy, derived from the MFMod model framework of the World Bank (see Burns et al., 2019). It corresponds to a standard macro-structural, with significant customizations to reflect the special characteristics of the Chadian economy.

Structural macro-econometric models are important tools for forecasting and policy analysis due to their ability to incorporate a detailed mix of judgement and the rich set of transmission channels they embody, which allows policy impacts on the broader economy to be followed at a deeper level of disaggregation than in other macroeconomic models, notably DSGE-type of models (Blanchard, 2018). MFMod-TCD is well suited to the present study. It incorporates the necessary flexibility to model alternative and complex oil revenue management mechanisms while accounting for the distinctive features of the Chadian economy, including: very specific debt-repayment rules for its restructured debt that imply a highly nonlinear repayment mechanism; a country-specific government behavior that reflects national priorities; and a highly constrained fiscal space.

Most importantly, MFMod-TCD includes a detailed and internally consistent description of both national income and fiscal accounts, with public expenditures affecting the real sphere of the economy, which in turn has an impact on both revenues and debt for the government. Those linkages are essential to assess the performance of a revenue management mechanism. In contrast, a pure fiscal-focused model would omit key components of fiscal sustainability, such as the direct relationship between savings from oil revenues on capital accumulation and the country’s sustainable growth path. The presence of such feedbacks in MFM-TCD allows the model to capture the trade-offs between lower volatility of public revenues and medium-term growth.

## **Model characteristics**

In the MFMod framework, country-specific models are designed to reproduce the flow of funds across the whole economy by mapping out the main identities of the national accounts, balance of payments, labor markets and financial sectors (Burns et al., 2019 provides a detailed description of the model structure and equations). Structural relationships are consistent with both economic theory and the observed dynamics of the economy. The short-run dynamics are data-driven, with estimated parameters reflecting the actual behavior of the economy. Most equations are estimated using error-correcting models and parameters were estimated using, or calibrated to, Chadian data. In the MFMod framework, the overall equilibrium growth path of the economy is determined by potential output, which is calculated using the production-function methodology which is a function of total factor productivity, the level of capital and labor. Deviations from equilibrium, as well as convergence to equilibrium, are determined by the historical behavior of the Chadian economy.

The data used in MFMod-TCD were obtained from the World Bank WDI database for national accounts data, the IMF for fiscal and balance of payments data and the ILO for labor market data. Detailed data on the fiscal accounts were sourced from the Ministry of Finance, and include:

- Oil revenues, grants and other non-oil-related revenues.

- Expenditures on goods and services, public wages and compensations of employees, interest payments, transfers and capital expenditures.

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