Effects of the fiscal rule and model assumptions on the response of inflation in the aftermath of a terms-of-trade shock
M. Andreyev
Does a stabilisation fiscal rule based on long-term oil prices and the formation of a sovereign wealth fund effectively reduce the volatility of output, inflation, and the exchange rate?
Given that the recent fiscal rule in Russia has been violated since the beginning of 2022, what might a new fiscal rule look like and will it be effective? We attempt to answer these questions using a dynamic stochastic general equilibrium model.
Our study shows that there are a number of economic parameters and types of fiscal rules under which the introduction of a mechanism for smoothing budget expenditures does not lead to a decrease in the volatility of some macroeconomic indicators. We have found that the cases when the introduction of a smoothing mechanism does not lead to a decrease in the volatility of output and of the exchange rate are rare and economically interpretable. As for the effect of the fiscal rule on inflation volatility, it turns out that it depends on many parameters such as the design of the fiscal rule, the duration of price and wage contracts, and the presence of capital controls.
The fiscal rule which operated until 2022 and used an external sovereign wealth fund proved to be the most effective for stabilisation purposes. In a new reality, given the impossibility of accumulating external reserves, the most effective and feasible rule turned out to be one that saves additional oil and gas revenues within the country and uses the debt market to smooth budget revenues.