Optimal financial repression
In the article there are analyzes the direction of reforming of institutional regulation of pension transfers in the developed world and in Ukraine. On the basis of the institutional approach argumented the importance of the transition to a funded pension system as adequate market conditions. Analyzed institutional factors limiting its introduction in Ukraine.
Financial repression in the form of regulated expansion of demand for public bonds with below-market rate of return stabilizes public debt and decreases its service cost. This helps financing of fiscal stimuli programs in times of economic recession and high public sector indebtedness. But being implicit and distortionary taxation of households, financial repression interferes with market mechanisms and can decrease the effectiveness of fiscal stimulus. In this paper we augment the New Keynesian dynamic stochastic general equilibrium model with the elements of financial repression to evaluate the impact of financial repression on fiscal multipliers. We compare different regimes of finance of fiscal expansion and confirm that lump-sum taxation delivers the highest multiplier, while proportional labor income taxation leads to substantial distortions and decreases the effectiveness of fiscal stimulus. Most importantly, we show that tighter financial repression in the form of higher requirement for households to hold public debt only marginally decreases the fiscal multiplier. At the same time, tightening repression by decreasing the rate of return on public bonds leads to higher fiscal multiplier. This result is in line with the literature, which shows higher effectiveness of fiscal stimuli under zero lower bound in the money market. We also estimate the short- and the long-run impact of financial repression on public debt. Under substantial inflation inertia, positive monetary policy shock provides long lasting effect of the liquidation of public debt.
The ageing of the population and the imbalance of public finances force governments to carry out pension reforms in order to insure the sustainability of pension systems. The reforming of social security systems is becoming even more urgent as the government ability to cover the deficit of pension funds with transfers from federal budgets is limited. The paper presents the modification of overlapping generations model developed by [Heijdra, Bettendorf, 2006]. The model was extended to account for the unbalanced pension system and endogenous interest rate, important in estimation of pension expenses. We consider an optimal combination of fiscal instruments depending on the retirement age, life expectancy and productivity of labour and compare social welfare in the case of balanced and unbalanced pension system. The welfare analysis shows that financing the pension fund deficit via income taxes is a part of optimal policy. It was also shown that when the deficit of the pension fund is covered by the government, income tax and social contributions are perfect substitutes when the interior solution is considered. Thus in case of balanced pension system optimal social contributions are positive and are used to finance pensions, while optimal income tax rate does not depend on the rate of population growth. In the case of unbalanced pension system, the maximization of welfare function points in favour of corner solution with zero social contributions and positive income tax, which depends on population growth, retirement age and labour productivity. While an unbalanced pension system with optimally chosen fiscal instruments allows to achieve higher social welfare due to higher level of capital per efficiency unit of labor and lower equilibrium level of public debt.
The paper examines the structure, governance, and balance sheets of state-controlled banks in Russia, which accounted for over 55 percent of the total assets in the country's banking system in early 2012. The author offers a credible estimate of the size of the country's state banking sector by including banks that are indirectly owned by public organizations. Contrary to some predictions based on the theoretical literature on economic transition, he explains the relatively high profitability and efficiency of Russian state-controlled banks by pointing to their competitive position in such functions as acquisition and disposal of assets on behalf of the government. Also suggested in the paper is a different way of looking at market concentration in Russia (by consolidating the market shares of core state-controlled banks), which produces a picture of a more concentrated market than officially reported. Lastly, one of the author's interesting conclusions is that China provides a better benchmark than the formerly centrally planned economies of Central and Eastern Europe by which to assess the viability of state ownership of banks in Russia and to evaluate the country's banking sector.
The paper examines the principles for the supervision of financial conglomerates proposed by BCBS in the consultative document published in December 2011. Moreover, the article proposes a number of suggestions worked out by the authors within the HSE research team.