Goal of research
Explanation of financial repression through the mechanism of strategic interaction between the government and independent central bank, evaluation of the effect of financial repression on the revenues collected from traditional taxes and its interchangeability with the tax on profits and income tax, studying the optimal fiscal policy and the role of expectations for the efficiency of monetary policy under zero lower bound, estimation and testing the reaction of intraday Russian stock market returns to the United States scheduled macroeconomic data releases, evaluation of the effects of the European Central Bank and the Bank of England verbal interventions on financial markets, developing a theoretical model of endogenous growth with technological change and acquisitions to make growth decomposition and analyze the government policy, targeted at stimulating growth through innovations and acquisitions, detailed classification, analysis, and presentation of the contemporaneous methods of identification of structural vector autoregression (SVAR) models used in macroeconomic analysis to determine the effects of policy or unexpected shocks, and, finally, studying the influence of wealth concentration on economic growth and the intensity of political conflict in society during the period of industrialization.
To study financial repression, a general equilibrium model with elements of strategic interaction between the government and central bank is used. Financial repression is modeled as the obligation imposed on the households to invest a certain share of their portfolios into government bonds. Moreover, to study liquidity trap, a New Keynesian dynamic stochastic general equilibrium model is built. To evaluate the effect of financial repression on the revenues collected from traditional taxes, regression analysis tools, including Smooth Transition Regression and Arellano-Bond model, are used. Furthermore, to quantify the effects of the central bank verbal interventions on financial markets, EGARCH(1,1) and ARIMA(1,0,1) models are estimated. Next, to evaluate the reaction of intraday Russian stock market returns to the United States scheduled macroeconomic data releases an event-study methodology and high-frequency time-series forecasting are used. Moreover, to study the role of innovations and acquisitions for economic growth, an endogenous growth model with technological change and mergers and acquisitions is developed. In addition, the methodology of regression analysis with microeconomic data and the method of moments for model calibration are used. Furthermore, counterfactual policy experiments with the calibrated model are conducted. Finally, to study the influence of wealth concentration on economic growth and the intensity of political conflict a model of overlapping generations with agents that are heterogeneous in land and capital is proposed. In this model, the agents make financial investments in lobbying their interests regarding economic policy. To find the equilibrium in this game, the shared functions approach and non-cooperative game theory are used.
Empirical base of research
To evaluate the effect of financial repression on the revenues collected from traditional taxes, the data from OECD (http://data.oecd.org), he World Bank (http://databank.worldbank.org), the International Monetary Fund (http://www.imf.org/en/Data), BIS (https://www.bis.org/statistics/index.htm), Bloomberg, and also Investing.com is used. Moreover, for estimation of the reaction of intraday Russian stock market returns to the United States scheduled macroeconomic data releases, this project uses the following data: FINAM stock market database on RTS and MOEX indices, Bloomberg Consensus Forecasts, and the data from the Bureau of Economic Analysis (http://www.bea.gov/). Furthermore, to evaluate the effects of the central bank verbal interventions on financial markets, the following sources are used: Minutes from Monetary Policy Committee meetings, the Inflation Report, the ECB monthly Economic Bulletin, the ECB Governing Council decisions on monetary policy, and regular interviews of the ECB authorities. Finally, in this project, the microeconomic data on Japanese innovative firms, their deals and patents, is employed.
Results of research
The results of this project show that, under the monetary leadership, the central bank’s concern about the interest rate stability helps to soften financial repression. Contrary, when the central bank is highly concerned with public debt stability and also has strategic advantage in policy making, that provokes severe financial repression. In a nutshell, in the case of the central bank’s leadership, financial repression instruments act as complements. In turn, when authorities make their decisions simultaneously and independently or in case of fiscal leadership, financial repression instruments are substitutes. Next, estimation of the Laffer curves for profit tax, income tax, and financial repression tax for 29 developed and developing OECD countries is another important result of this project. For the profit taxes, it is shown that the United States and Chile are located on the right (wrong) branch of the Laffer curve. Regarding the income taxes, these countries include Austria, Belgium, Great Britain, Italy, Portugal, and Slovenia. Finally, for the financial repression tax, Austria, Germany, Denmark, and the United States are located on the right branch of the Laffer curve. Therefore, the other countries have an opportunity to raise tax rates in order to increase their tax revenues. In addition, in the framework of the standard New Keynesian model, it is shown that there is a dynamically consistent fiscal policy that can lead the economy to an optimal equilibrium in the liquidity trap. Another important result states that the combination of increase in the labor tax and decrease in the consumption tax can be used to solve the liquidity trap problem. Moreover, it is shown that theBritish indicators, such as the FTSE index and LIBOR rate, are no longer responding to European news after the Brexit referendum, while the EuroStoxx50 index and EURIBOR, on the contrary, are now paying more attention to British verbal interventions in addition to their domestic news. Another important result of this research is the equation for growth decomposition and the empirical evaluations of various government policy instruments aiming at stimulating economic growth. In particular, it is shown that co-financing of the acquisition expenditure increases innovation and acquisition rates. The methodological part of this project also includes a detailed description of short- and long-term restrictions under the baseline and alternative approaches in SVAR identification as well as an introduction to Bayesian identification. Finally, it is shown that the effect of capital concentration on growth rates differs at different stages of growth. As separate historical cases confirming the theoretical results, the conflicts between landowners and industrialists in the era of the industrial revolution in Western Europe and the structural limitations of growth in the Islamic world are considered.
Level of implementation, recommendations on implementation or outcomes of the implementation of the results
Results of economic growth decomposition that show the relative importance of innovations and technological acquisition expenditures may be useful for elaborating the innovation policy. Moreover, the algorithms considered in the current project can help the Russian researchers to use the wide opportunities offered by modern macroeconometrics to identify structural vector autoregression models.