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­­­Fiscal and monetary policy under economic and financial instability

Priority areas of development: economics
2016
The project has been carried out as part of the HSE Program of Fundamental Studies.

Goal of research: Formulation of macroeconomic policy recommendations aimed at short run volatility stabilization and economic growth stimulation, development of the calibration method for a model, which is based on the synthesis of DSGE and agent-based modeling, evaluation of importance of the monetary policy shocks for Russian economy, evaluation of the impact of the Bank of Russia’s verbal interventions on RTS and MICEX indices, derivation of the optimal combination of measures – measure of consolidation and reforms of the pension system – chosen by the benevolent government, estimation of impact of financial repression on government revenues, evaluation of the parameters of optimal financial repression in the form of nonmarket debt placement in the pension fund, clarification of the principal reasons of differences in the quality of forecasts, and estimation of impact of inequality in capital, land and innate talent on the evolution of wealth inequality.

Methodology: Construction and estimation of a DSGE model using dynamic optimization of agents’ behavior in the presence of nominal and real rigidities, solution of forward-looking equations by Blanchard-Kahn method, Calman filter for likelihood function estimation, and maximization procedures of Sims and Ratto. For estimation of GARCH-models a quasi-maximum likelihood approach is used. For studying the questions related to financial repression an overlapping generations model with infinite horizon and a neoclassical dynamic general equilibrium model are developed. To obtain out-of-sample point forecasts an estimated DSGE model, a BVAR and a frequentist VAR are used. Finally, to show the joint evolution of inequality in incomes a two-sector unified growth model with incorporated asymmetric public policy game is used.

Empirical base of research: Databases of the Bank of Russia (http://www.сbr.ru), the Bank of Russia’s verbal interventions for 2014-2015, collected using open sources, the Federal State Statistics Service (http://www.gks.ru), Bloomberg Professional (http://www.bloomberg.com/professional/), the U.S. Bureau of Economic Analysis (http://www.bea.gov/), the International Monetary Fund (http://www.imf.org/en/Data), the Federal Reserve System (http://www.federalreserve.gov/econresdata/statisticsdata.htm), and the World Bank (http://databank.worldbank.org).

Results of research: The project results in a number of policy implications under conditions of external and financial volatility. The method for the calibration and analysis of the model, constructed on the basis of the synthesis of DSGE modeling and agent-based models, is developed. Also it is shown that the verbal interventions of the Bank of Russia have an impact on the RTS returns, but do not affect the MICEX returns. It is argued that there is no impact of the Bank of Russia’s verbal interventions on the volatility of RTS and MICEX indices. Furthermore, it is shown that in the case of unbalanced pension system income tax and social contributions can act as imperfect substitutes, and then it is optimal to finance pensions by income tax. In the part of the project that is devoted to financial repression it is shown that tighter financial repression shifts Laffer curves for consumption and labor down, but increases the revenue from capital-income taxation.  Additionally, despite negative effect on output, the financial repression leads to increase in government purchases. Moreover, it is concluded that financial repression in the form of nonmarket debt placement can be the optimal choice of the populist government. In addition, it is shown that the forecasts obtained with a DSGE model are in general less accurate than those of BVAR model. Finally, it is argued that wealth inequality is driven by difference in land endowment on early stages of development and is determined by difference in talent endowment on modern stages of development.

Level of implementation, recommendations on implementation or outcomes of the implementation of the results: The developed overlapping generations model can be used for the elaboration of the pension reforms. Moreover, the proposed methodology of estimation of financial repression impact can be used by fiscal authorities for a quantitative evaluation of financial repression outcome. In general, most of the results of this project can be used as policy implications since nowadays many economies suffer from economic and financial instability.

Publications:


Демешев Б. Б., Малаховская О. А. Макроэкономическое прогнозирование с помощью BVAR Литтермана // Экономический журнал Высшей школы экономики. 2016. Т. 20. № 4. С. 691-710.
Яркин А. М., Веселов Д. А. Распределение богатства и политический конфликт в модели перехода от стагнации к развитию // Журнал Новой экономической ассоциации. 2016. Т. 32. № 4. С. 30-60.
Kuznetsova O. The Value of Public Information in a Two-Region Model / NRU Higher School of Economics. Series WP BRP "Economics/EC". 2016. No. 126.
Sokolova A., Havránek T. Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not" / NRU Higher School of Economics. Series WP BRP "Economics/EC". 2016. No. 137/EC/2016.
Кузнецова О. С., Ульянова С. Р. Влияние вербальных интервенций Банка России на фондовые индексы // Журнал экономической теории. 2016. № 4. С. 18-27.
Демешев Б. Б., Малаховская О. А. Картографирование BVAR // Прикладная эконометрика. 2016. Т. 43. С. 118-141.