Methodology: Estimation of a DSGE model, using multivariate optimization methods based on Newton's method for finding the optimal coefficients. Moreover, construction of an overlapping generations model with the fully-funded pension system and fiscal policy. Then the out-of-sample point forecasts, which are ranked based on their RMSFE, are obtained with Bayesian VAR, frequentist VAR, and random walk. For studying the questions related to economic growth a two-sector unified growth model and a non-balanced exogenous growth model with three sectors of production are developed. The demand and supply effects are analyzed through the decomposition of structural changes.
Empirical base of research: databases of the Federal State Statistics Service (http://www.gks.ru), the International Monetary Fund (http://www.imf.org/en/Data), the Central Bank of the Russian Federation (http://www.сbr.ru), KLEMS (http://www.worldklems.net/data.htm), the Federal Reserve System (http://www.federalreserve.gov/econresdata/statisticsdata.htm), Global Trade Alert (http://www.globaltradealert.org/), the World Bank (http://databank.worldbank.org), the U.S. Bureau of Economic Analysis (http://www.bea.gov/), Bloomberg Professional (http://www.bloomberg.com/professional/), and OECD (https://data.oecd.org/).
Results of research: We develop an approach which allows embedding an agent-based model of financial market in the financial accelerator DSGE model. Moreover, we show that the optimal level of the exchange rate flexibility in Russia is lower than its estimated value for the period after 2008. It means that the Bank of Russia should continue stabilizing interventions in the foreign exchange market during the transition to the inflation targeting. Furthermore, we conclude that in the case of high default costs there can be two equilibria. On the one hand, in the “good” equilibrium households' investment in foreign assets is low, revenue from labor tax collection is high and the probability of default is low. On the other hand, in the “bad” equilibrium households hedge against losses associated with default by investing large proportion of their income in foreign assets. This reduces labor supply, decreases revenues from labor tax collection and raises the probability of default. Therefore, high default costs may tighten fiscal limits and increase the probability of an excusable default. Moreover, we show that uncertain government preferences lead to more expansionary monetary policy and more contractionary fiscal policy. As a result, inflation bias is aggravated: expected inflation increases, while expected output drops. Nevertheless, if fiscal multiplier is certain, preference uncertainty does not matter anymore. In addition, we show that a lot of Russian macroeconomic indicators can be forecasted by Bayesian VAR more accurately than by the competing models. Finally, we conclude that the Dutch disease considerably influences the dynamics of employment in the industrial sector, explaining up to 80% of variation. The other factors such as supply-side factors, and the changes in employment in public service sector leads also to the decline the employment in manufacturing sector, but their cumulated effect is relatively low.
Level of implementation, recommendations on implementation or outcomes of the implementation of the results: The approach that we develop in our study can be used for eliminating the inability of DSGE models to analyze stochastic and volatile dynamics of financial markets. Moreover, the optimal monetary rules that we derive in this project can be useful during the transition to the inflation targeting regime by the Bank of Russia. Also the model which we develop can be used for forecasting of any macroeconomic aggregate series in the framework of applied macroeconomic research. Finally, the result that higher taxes on foreign assets held by domestic agents may increase revenues from labor tax collection and relax fiscal limits can be useful for fiscal authorities. In general, most of the results of this project can be used as policy implications because nowadays the problems of financial repression, sovereign default, and the interaction between fiscal and monetary policy are considered as the issues of current importance for many countries.