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  • Conjoint Effect of Fiscal Rule and Inflation Targeting on the Development of Countries with Resource-Based Economies

Student
Title
Supervisor
Faculty
Educational Programme
Final Grade
Year of Graduation
Anna Titova
Conjoint Effect of Fiscal Rule and Inflation Targeting on the Development of Countries with Resource-Based Economies
Economics
(Bachelor’s programme)
2018
The necessary condition for sustainable economic development of any country is known to be the maintenance of macroeconomic stability, namely: the predictability of domestic economic conditions, low rate of inflation and long-term interest rates. Therefore, on the monetary policy side, the Central Banks decide to switch over to the regime of inflation targeting (IT) in order to achieve a much lower and more stable inflation. On the fiscal policy side, according to worldwide experience, the budgetary rules are the only viable mechanism which enables minimizing the influence of both external and internal volatility on economic conditions. However, the inflation targeting and budgetary rules regimes are often considered in research papers separately, in spite of the fact that they have a common goal related to ensuring stability and predictability of macroeconomic conditions. As a result, the interaction effect, which can have a significant effect on the results of applying these regimes, may be missed.

That is why the central goal of this graduation paper is that to analyse the results of joint application of IT and FR, using examples of the commodity-dependent countries. We have constructed dynamic regression models for both the group of "resource" and "non-resource" countries, as a result of which it was estimated that for both samples, the joint application of budget rules and inflation targeting has a significant impact on the volatility of fiscal and monetary indicators. However, for the group of "non-resource-dependent" countries, the effect turned out to be less significant than for "resource-dependent" states.

Moreover, one of the tasks of this graduation paper is to determine the optimal combination of the type of rules with inflation targeting. According to obtained results, the most effective is the interaction of the debt rules and IT.

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