The paper aims to verify the introduction of the golden rule of public finance under an active monetary stance for a developing economy using a dynamic stochastic general equilibrium model. Besides the two rigidities, namely the deep habit formation and Calvo-style price stickiness, the model structure incorporates real money holdings and welfare-enhancing government purchases in the utility-generating function and a modified Taylor rule. The simulation results have validated the visible crowding-out of private consumption and investment in the short run and a positive impact of the productive government spending on long-run growth, but with some important caveats. In the case of a developing economy that usually has low efficiency and high returns to public capital, the given factors prove significant in addressing the study issue. The results are robust in terms of the structure of utility-generating function, a relatively high share of liquidity-constrained households, and a degree of price stickiness. Moreover, to offset the debt accumulation as a result of increased public investment financing by persistent output growth, in the long run, the central bank should not only rely on response to the fluctuation of inflation and output but also account for a move of public debt.
The paper addresses an estimation of public debt-to-GDP threshold ratio in the developing economy encountered with an excessive public debt impact on macro dynamics. An active field of the study focuses on the internal public debt due to a recent tendency of external share substitution in the developing economies. Among a lot of publications dedicated to the public debt, the study object usually focuses on an array of countries using the same method to evaluate the threshold ratio. Analyzing behavior specifics concerning economy in crises and thereafter, there is a need to carry out the public debt study for the particular economy as well. The research suggests an algorithm for determining internal public debt-to-GDP threshold ratio by applying a scenario modeling tool. Taking into account a growing burden of public debt in Ukraine, the authors have elaborated an econometric macro model operated through fiscal-monetary interaction. The model was used to evaluate the internal public debt-to-GDP threshold ratio in Ukraine. The threshold ratio proves to be 40% of GDP, while the similar result for the total amount of public borrowings is about twice as high. Although the given ratio remained below the estimated threshold as of the mid-term of 2017, a space degree is small and going to collapse soon. Considering sluggish economic recovery following the last recession took place in 2014-2015, Ukraine will face the challenge of reopening the agenda of growing debt burden in a near future.
Introduction. There have been several crises in the world economy since the end of the last century. The developing economies were ones that have suffered the most considering the level of openness, the weak institutional framework, and the market vulnerability to unpredictable shocks. One of the instruments widely used to prevent crises is the Early Warning System models. Purpose. The paper pursues the goal to develop Early Warning System model using logit/probit regression to determine early warning arguments and their appropriate thresholds for Ukraine. Results. The regression algorithm corresponds to the determination of the dependent binary variable associated with the output gap followed by the selection of independent early warning components. The method of integral composite coincident and leading indicators employs to reproduce the quarterly dynamics of real GDP. 1. The arranged coincident indicator depends on the industrial production, agriculture, construction, and the domestic retail trade. The expanded to monthly data quarterly GDP is exploited for the evaluation of the output gap using multivariate filter and Okun's law definition. The 2% difference between the actual and potential GDP is applied for generating binary data of the output gap. 2. The two components of the integral leading index, the world prices of wheat and Russian gas plus the world price of steel figure out one independent variable of logit/probit regression marked as the world price of raw materials. Another one independent variable is arranged by monitoring the demand-supply gap. 3. The obtained probit results are more statistically significant in comparison to the logit model. The marginal effects are 1% for the world price of raw materials and 3% for the demand-supply gap. Conclusions. Considering the higher marginal grade, between two early warning components the demand-supply gap is more sensitive for predicting crises in Ukraine. In the following study, the other early warning components have to be examined for higher predicting capability.
<abstract> <p>The paper addresses a trade-off between the degree of fiscal dominance and fiscal and monetary sustainability conditions. The research aims at finding growth incentives in the complex fiscal-monetary environment. By testing the actual data, the study introduces the empirical specification of the non-linear relationship between the dynamics of broad money and public debt, which allows for interpolating the fiscal space. The study develops a Dynamic Stochastic General Equilibrium (DSGE) model for a small open developing economy that, in addition to several rigidities, such as deep habit formation, staggered pricing and wage stickiness, also incorporates the extended fiscal and monetary policy blocks, a composite lifetime utility-generating function, a low level of public investment efficiency and a negative relationship between the interest rate premium and foreign prices fluctuation. Employing the developed DSGE framework made it possible to outline a promising growth path in the policy trade-off between the degree of fiscal dominance and the persistence of sustainability conditions. The modeling results revealed that short-term growth outweighs the crowding-out effect and that excessive macroeconomic volatility, especially price and debt dynamics, is well-curbed. The calculation of elasticity functions allowed for calibrating the interrelationship between the maximum growth rate of output, the degree of fiscal dominance and the persistence of fiscal and monetary sustainability conditions. The study highlights two key messages. The public debt ratio is not the final indicator to determine fiscal sustainability conditions. The degree of dominance, not the ratio of public debt to output, matters most that fiscal and monetary authorities should consider in pursuing growth incentive policy.</p> </abstract>
Abstract. The growing public debt that intensifies with a frequency of economic crises grasps a high rating in the current economic debates. There is an urgent need for implementing an effective policy regime targeted at handling the public debt problem. The fiscal dominance policy, usually practiced to ensure strong recovery and growth, has a strict guideline for identifying a degree of fiscal expansion and monetary accommodation. Given a dilemma between growth and debt burden, the government should mobilize the most effective policy instrument targeted at the highest fiscal multiplier and does not cross a debt-to-GDP threshold ratio. Following an effective practice of fiscal management, this instrument is associated with public investment. The paper aims to assess the magnitude of the public investment multiplier by following a stable growth path limited by a prescribed debt limitation for a developing economy. To achieve the goal, we use an elaborated New Keynesian model, which besides an active fiscal and monetary stances, also includes a high share of non-Ricardian households, the separability in preferences between private and government consumption, a low level of public investment efficiency, and the substantiated degree of nominal and real rigidities. The obtained present value cumulative output multiplier for public investment grasps the point 2.0 in maximum over two years of the impulse response function. The multiplier effect proves to be high enough to offset temporary public debt growth and maintain a sustainable growth path over the long run. The verified measure of fiscal dominance contradicts an active monetary stance and, among other things, has to be counterbalanced by an appropriate efficiency and productivity of public investment and degree of price stickiness. Keywords: fiscal policy, monetary policy, fiscal-monetary interaction, fiscal dominance, fiscal multiplier, DSGE modeling. JEL Classification O47, E63, H63, D58 Formulas: 1; fig.: 2; tabl.: 0; bibl.: 21.
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