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Methods of Analysis of Unconventional Monetary and Fiscal Policy

Priority areas of development: economics
2018
The project has been carried out as part of the HSE Program of Fundamental Studies.

Goal of research

Studying the role of credit rationing in a small open export-oriented economy. Evaluation of the contribution of credit rationing to the dynamics of Russian economy, measuring the effects of the Russian Government and the Bank of Russia’s verbal interventions on the USD/RUB exchange rate, studying the trade off of the government between default and financing the government purchases with tax revenues and seigniorage only and repayment of the government debt, examination of the government’s choice between financing its spending with explicit tax on capital or financial repression, estimation of the impact of financial repression on the effectiveness of fiscal stimulus and effect of liquidation of government debt, studying the impact of the presence of non-Ricardian agents on optimal fiscal policy, forecasting CPI inflation with a mixed data frequency model, and, moreover, determination of the mutual influence of emigration of a skilled labor force and the quality of economic institutions in the country of origins for emigrants.

Methodology

To study the role of credit rationing in a small open export-oriented economy, a dynamic general equilibrium model is developed. Moreover, to estimate this model, a variety of techniques, including the Blanchard-Kahn method, the Calman filter, and the ‘newrat’ algorithm created by Ratto, are used. Furthermore, to measure the effects of verbal interventions on the exchange rate, the maximum likelihood estimation of GARCH-models is applied. To characterize the choice of the government between default and repayment of the government debt, a stylized model for a small open economy with fiscal and monetary authority with strategic default and currency devaluation is developed. Moreover, to study the issues related to financial repression, first, a modified Ramsey model with financial repression and three types of government expenditures is constructed. Second, a new-Keynesian dynamic stochastic general equilibrium model with heterogeneous markets, incomplete markets is extended to include financial repression as a requirement to hold the government bonds at a below-market rate. In addition, to evaluate the impact of the presence of non-Ricardian agents on optimal fiscal policy, an overlapping generations model in continuous time with an infinite horizon and uncertainty about the time of death is developed. The model follows Heijdra and Bettendorf (2006), but includes the unbalanced pay-as-you-go pension system and two types of agents – Ricardian and non-Ricardian. To forecast inflation, several mixed data frequency models (MIDAS) and two homogenous data frequency models are estimated. Each model is used to do the one-period forecast on an expanding sample window (cross-validation procedure) and to estimate the accuracy measures (RMSE и MAE). Finally, to study the issues of emigration of a skilled labor force a dynamic game theoretical model is constructed. In this model, a tax rate, barriers for emigration and barriers of entry into political markets are set in the political equilibrium. To characterize the optimal strategies for each of agents, the Bellman equations are used.

Empirical base of research

Datasets of the Federal State Statistics Service (http://www.gks.ru), the Bank of Russia (http://www.сbr.ru), Bloomberg, the World Bank  (http://databank.worldbank.org), the OECD Main Economic Indicators (https://data.oecd.org/). Moreover, to study the verbal interventions of the Russian Government and the Bank of Russia, the text data is collected from newspapers’ websites (http://vedomosti.ru, http://rg.ru, etc.) and FINAM (http://www.finam.ru).

The results of the project show that the credit rationing is an important channel for the Bank of Russia to influence the economy. The underlying mechanism is related to the forward-looking behavior of agents who understand the non-zero probability of loosing access to financing at the official rate in the future. It amplifies the automatic stabilizer effect of exchange rate fluctuations and creates the countercyclical dynamics of GDP and aggregate consumption. Another important conclusion of the project is that the returns of the USD/RUB exchange rate were higher when the Bank of Russia communicated lower inflation risks and higher RUB devaluation in 2014-2016. The USD/RUB returns were also higher when the representatives of the Russian Government announced the higher exchange rate volatility and the higher deficit. In addition, the days when the Russian Government communicated higher inflation risks or stricter fiscal policy were characterized by lower USD/RUB returns. Furthermore, it is shown that even when foreign investors completely trust the government, it still can declare a default when central bank abandons fixed exchange rate. In particular, the incentives to default are higher in the countries with low factor productivity and high level of initial debt. Also it is concluded that regardless of the government spending type, the government’s choice, that guarantees maximum level of consumption or minimum crowding out in the steady state, is explicit tax on capital in the absence of financial repression. On the other hand, it is indicated that financial repression enables to effectively eliminate public debt by strengthening the effect of liquidation in the short term due to an increase in inflation. Moreover, another important result of this project shows that the pension system can help to smooth consumption of the non-Ricardian agents. It is concluded that the optimal choice of government expenditure is increasing with the share of non-Ricardian consumers, compensating the decrease of their welfare at retirement. Finally, it is argued that there is a causal relationship between the political variables (a tax rate, barriers for emigration, barriers of entry into political markets) and optimal occupation choice of high-skilled workers. In particular, it is shown that the policies that promote emigration can be a best strategy for an incumbent to increase her tenure at the office.

Level of implementation, recommendations on implementation or outcomes of the implementation of the results

The prescriptions of the model developed in this project and the results of its simulation can be used by the central banks both for the choice of an exchange rate regime and for elaborating the unconventional monetary policy design. Furthermore, the results of this project show the perspectives of using the models with different data frequency for forecasting a variety of Russian macroeconomic indicators. Implementation of these results will be important for policy-makers.

Publications:


Норкина О.А. Финансовая репрессия и популизм // Экономическая политика. 2018. Т. 13. № 1. С. 122-147. doi
Норкина О.А. Модель Рамсея с финансовой репрессией и государственными закупками // Экономический журнал Высшей школы экономики. 2018. Т. 22. № 4. С. 631-661. doi
Veselov D. A., Kadyrbekov A. Migration of Russian settlers and the legacy of inter-regional development in Kazakhstan / NRU HSE. Series WP BRP Series: Economics / EC "Препринты Программы фундаментальных исследований". 2019.
Andrei G. Shulgin. Monetary Regime Choice and Optimal Credit Rationing at the Official Rate: The Case of Russia // International Economic Journal. 2018. Vol. 32. No. 4. P. 631-668. doi
Pyltsyna E. The Change of Fiscal Multiplier When Switching from Managed Exchanged Rate to the Floating One / NRU HSE. Series 206EC2018 " WP BRP “Economics/EC”". 2018.
Mamedli M., Vlasov S. Russia’s pension system in the context of world experience and expected trends / Series "BOFIT Policy Brief". 2018. No. 10/2018.
Кузнецова О. С., Ульянова С. Р. Валютный курс и вербальные интервенции Банка России и органов государственной власти // Экономический журнал Высшей школы экономики. 2018. Т. 22. № 2. С. 228-250. doi
Арефьев Н. Г., Хабибуллин Р. А. Байесовская идентификация структурных векторных авторегрессий // Прикладная эконометрика. 2018. Т. 49. С. 115-142.