DSGE MODELING IN THE FOCUS OF FISCAL AND MONETARY ISSUES
Abstract
Due to the intensification of the economic crisis in the late 20th – early 21st, fiscal and monetary issues have activated an impressive discourse, which became the prominent markers of helpful research engines for supporting sustainable development in the face of increasing debt burden. One of the most effective scenario modeling methods for implementing economic policy is the Dynamic Stochastic General Equilibrium (DSGE) model. The global practice in operating with such a tool is focused mainly on developed countries, while developing economies have significant differences and require notable adjustments. The goal of the presented study is to highlight the exercise of solving fiscal and monetary issues using a DSGE modeling toolkit for a developing economy. An incomplete list of proven features of DSGE modeling for a developing economy regarding the solution of fiscal and monetary issues includes: a high proportion of non-Ricardian consumers, forced unemployment, limited competition in the labor market, a significant volume of remittances, low efficiency and high capital return of public investment, low degree of home bias, smoothing crowding-out effect, financial repressions, limited mobility in the international capital market, lack of clear and transparent rules, and overruled fiscal and monetary spaces. In the context of the fiscal and monetary study, problematic issues of DSGE modeling are not limited only to the difficulties of theoretical and technical solutions. With the gradual elimination of barriers between the sectors in the world economy due to global transformations, the driving forces of growth require reviewing the anti-crisis management toolkit. Taking into account the progressive technological shifts in the field of information transmission and processing, the solution of the listed problematic issues related to the theoretical and technical support of DSGE modeling for a developing economy adds a new definition to the powerful hardware tool that reproduces specific scenario conditions for assessing the consequences of economic policy implementations.
References
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Horton, S., Dipak, M. & Ravi, K. (1994). «Overview» in labor markets in an era of adjustment. Vol. 1. Washington D.C.: World Bank.
Castillo, P. & Carlos, M. (2010). Monetary policy in the presence of informal labour markets. Banco Central de Reserva del Peru. DT Working Paper series, 2010-009.
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Dabla-Norris, E. et al. (2011). Investing in public investment: an index of public investment efficiency. IMF Working Papers, WP/11/37.
International Monetary Fund. (2012). Macroeconomic Policy Frameworks for Resource-Rich Developing Countries.
Florence, A. & Hurlin, C. (2006). Estimates of Government net capital stocks for 26 developing countries, 1970–2002. World Bank Policy Research Working Paper, 3858.
Ilzetzki, E., Mendoza, E. G. & Gramont, C. A. (2011). How big (small?) are fiscal multipliers?. IMF Working Papers, 52, 66 p.
Batini, N., Eyraud, L., Forni, L. & Weber, A. (2014). Fiscal multipliers: size, determinants, and use in macroeconomic projections. IMF Technical Notes and Manuals, 4, 33 p.
Shen, W., Yang, S. & Zanna, L. (2018). Government spending effects in low-income countries. Journal of Development Economics, 133, 201–219.
Jafarov, E., Maino, R. & Pani, M. (2019). Financial repression is knocking at the door, again. Should we be concerned?. IMF Working Papers, 211, 66 p.
Chinn, M. D. & Ito, H. (2006). What matters for financial development? Capital controls, institutions, and interactions. Journal of Development Economics, 81(1), 163–192.
International Monetary Fund, (2011). Revenue Mobilization in Developing Countries. Washington, D.C.
Bi, H., Shen, W. & Yang, S. (2016). Fiscal limits in developing countries: A DSGE approach. Journal of Macroeconomics, Elsevier, 49(C), 119–130.
Woodford, M. (2003). Interest and prices: Foundations of a theory of monetary policy. Princeton, NJ: Princeton University Press.
Freedman, C. & Laxton, D. (2009). Why inflation targeting?. Washington, DC: IMF Working Paper, 09/86.
Blanchard, O. & Gali, J. (2007). Real wage rigidities and the new Keynesian model. Journal of Money, Credit and Banking, 39(1), 35–65.
O’Connell, S. (2015). Towards a rule-based approach to monetary policy evaluation in Sub-Saharan Africa. Journal of African Economies, 20, AERC Supplement 2, ii36–ii66.
Berg, A. et al. (2015). Monetary policy issues in Sub-Saharan Africa. Policies and Practices, 2, 62–87.
Kumhof, M., Nunes, R. & Yakadina, I. (2010). Simple monetary rules under fiscal dominance. Journal of Money, Credit and Banking, 42(1), 63–92.
