Case of Russia and Kazakhstan May 02 2014 Mavzuna Turaeva Kwang Jae Sung GAMS MODEL PROJECT SPRING 2014 1 Introduction Dependence of a smaller economy upon a bigger economy RussiaKazakhstan ID: 392682
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Slide1
Depreciation Model Case of Russia and Kazakhstan
May 02 2014Mavzuna Turaeva, Kwang Jae Sung
GAMS MODEL PROJECTSPRING 2014 Slide2
1Introduction
Dependence of a smaller economy upon a bigger economy (Russia-Kazakhstan)
Russia’s devaluation of currency
Subsequent trade shock in Kazakhstan due to a decrease in demand for their export in Russia
Monetary approach to recover the trade deficit affecting the smaller economy
Objective of the project
Demonstrate trade tax symmetry theorems using GAMS model
Construction of a GAMS model simulating the depreciation of
currency under different scenarios
On February 11
th
2014 the National Bank of Kazakhstan has decided to stop maintaining the value of
tenge
at the previous level by reducing the volumes of trades in the foreign exchange market and interference in the process of
tenge
exchange rate formation.
In his statement the chairman of NBK laid out several reasons why the National Bank decided to stop maintaining the value of
tenge
at the previous levels among which was Russian
rouble
remains volatile. In 2013 the Central Bank of the Russian Federation adopted a freer exchange rate and the value of
rouble
weakened by 7.1% against U.S. dollar. Slide3
2Introduction - theorems
Applicable trade tax theorems
Theorem
2
An a percent change in the tax factor on any balance of payments item is symmetric to a - a percent change in the subsidy factor on
it
and. an a percent change in both the tax and subsidy factors on it is neutral.
Theorem 6
The
Generalized Meade-Ruffin Symmetry
Theorem An a percent change in all net tax factors on non-monetary credits combined with an a percent change in all net subsidy factors on non- monetary debits is symmetric to an a percent change in the price of domestic
currency. Theorem 7 The Generalized Meade-Ruffin Neutrality
Theorem An a percent change in all net tax factors on non-monetary credits combined with an a percent change in all net subsidy factors on non- monetary debits and an a percent appreciation of the domestic currency is neutral. Slide4
The Balance of Payments Approach to Trade Tax Symmetry TheoremsAuthor(s): William H. Kaempfer and Edward TowerSource: Weltwirtschaftliches Archiv, Bd. 118, H. 1 (1982), pp.
148-165Published by: SpringerStable URL: http://www.jstor.org/stable/40439007 .Accessed: 21/02/2013 08:40 3ReferenceSlide5
4Methodology
Key Assumptions
Two-country model: Russia and Kazakhstan
Endowment Economy
Two commodities produced (Commodity 1: Mineral / Commodity 2: Consumer products)
Analysis from the smaller economy’s perspective
(Kazakhstan: Country A, Russia: Country B)
a.
prices of Kazakhstan goods are fixed at the world prices
b.
Kazakhstan uses the proceeds from exports in order to pay for imports Trade balance is exogenous
Slide6
5Parameters
ParameterSpecification
Alpha
Shift parameters in Utility
Beta(I)
Share parameters in Utility
PW(I)
World Prices
PD0(I)
Domestic Prices
U0
Initial Utility level
C0(I)
Initial Consumption levelsX0(I)Initial trade flows
Q0Initial output levelsGDP0Initial GDPis0
Import subsidy
it0
Import tax
es0
Export subsidy
et0
export tax
Y0
Initial Money Income
TB0
Initial Trade Balance
Si0
Import subsidy factor
Ti0
Import tax factor
Te0
Export tax factor
Se0
Export subsidy factor
A0Border tax adjustment factorRPD0Relative domestic price of importRPW0Relative world pricesE0Exchange rate Tenge per RubleCPI0Inflation
Table A: Summary of parametersSlide7
6Initial Values
Table B: Summary of initial values
Initial Values Assigned and Computed
PW(I)=1
PD0(I)=PW(I)
RPD0=1
RPW0=1
Q0=100
is0=0.2
it0=0
es0=0
et0=0
Se0=(1+es0)/(1+et0)
Te0=(1+et0)/(1+es0)
Ti0=(1+it0)/(1+is0)Si0=(1+is0)/(1+it0)A0=Ti0/Te0Beta('1')=0.3Beta('2')=0.7
E0=PW(‘2')/PD0(‘2')
C0('1')=Q0*BETA('1')
X0('1')=Q0-C0('1')
Y0=Q0*PD0('1')
C0('2')=(Y0-C0('1'))/PD0('2')
X0('2')=C0('2')
U0=Y0
Alpha=U0/(C0('1')**Beta('1')*C0('2')**Beta('2'))
TB0=X0('1')-X0('2')
CPI0=Y0/U0Slide8
7Variables
Table C: Summary of variables
Variables
Specification
U
Utility
X(I)
Trade
flow
C(I)
Consumption
GDP
GDP
PD(I)
Domestic pricesYMoney incomeTB
Trade
balance
Ti
Import tax factor
Te
Export
tax factor
RPD
Relativ
e domestic price of import
RPW
Relative world
price
A
Border
tax adjustment factor
Is
Import
subsidy
SeExport subsidy factorSiImport subsidy factorCPIInflationEExchange rate (Tenge per Ruble)Slide9
8Equations
Table D: Summary of system equations
Utility
U=E=Alpha
*(C('1')**Beta('1')*C('2')**Beta('2
'))
Domestic Price for consumer products
PD
('2')=E=PW('2')*
Ti
Domestic Price for minerals
PD
('1')=E=PW('1')/
TeDemand for minerals C('1')*PD('1')=E=(BETA('1')/(1-BETA('1')))*C('2')*PD('2')Demand for consumer products
C('2')*PD('2')=E=Y-C('1')Material Balance for minerals X('1')=E=Q0-C('1')Material Balance for consumer products
X
('2')=E=C('2
')
Total Money Income
Y=E=C
('1')*PD('1')+C('2')*PD('2
')
Trade Balance
TB=E=X
('1')-X('2
')
Trade Equilibrium
TB=E=0
Relative price in terms of
tenge
RPD=E=PD
('2')/PD('1
')
Relative prices in terms of dollarRPW=E=RPD/ABorder tax adjustment factorA=E=Ti/TeNet import tax factorTi=E=(1+it0)/(1+is0)Net export tax factorTe=E=(1+et0)/(1+es0)Net import subsidy factor Se=E=(1+es0)/(1+et0)Net export subsidy factorSi=E=(1+is0)/(1+it0)InflationCPI=E=Y/USlide10
9Different Scenarios
Summary of scenarios examined
Scenario I. Demonstration of Theorem 2
Increase
of import subsidy by 20
% Increase
of both import subsidy and tax by 20%
An a percent change in the tax factor on any balance of payments item is symmetric to a - a percent change in the subsidy factor on it and. an a percent change in both the tax and subsidy factors on it is
neutral
Scenario II. Russian depreciation of currency by 7.1%
Scenario III. Demonstration of Theorem 6 An a percent change in all net tax factors on non-monetary credits combined with an a percent change in all net subsidy factors on non- monetary debits is symmetric to an a percent change in the price of domestic currency.
Scenario IV. Demonstration of Theorem 7
An a percent change in all net tax factors on non-monetary credits combined with an a percent change in all net subsidy factors on non- monetary debits and an a percent appreciation of the domestic currency is neutral.
Scenario V.
Kazakhstan’s depreciation of currency by 20%
Slide11
10GAMS Results
Scenario 1
Scenario 2Scenario 3
Scenario 4
Scenario 5
20% import subsidy
20% import subsidy & 20% import tax
Ruble
depreciation by 7.1% via proportionate change in export tax and import subsidy
Simultaneous appreciation of domestic currency
Depreciation of
tenge
by 20%
VariablesLevel
LevelLevelLevelLevel
U
99.660
100
99.951
100
99.796
Import
73.684
70
71.420
70
67.022
Consumption
26.316
30
28.580
30
32.978
Domestic
price of export1.0001.0001.0001.0001.000Domestic price of import0.8331.0000.9341.0001.148Money income87.71910095.265100109.926Trade
balance
.
.
.
.
.
Net
import tax factor
0.833
1.000
0.934
0.934
1.148
Net
export tax factor
1.000
1.000
1.071
1.071
0.871
Rel.
domestic prices
0.833
1.000
0.934
1.000
1.148
Rel. foreign prices
1.000
1.000
1.071
1.147
0.871
Border
tax adj. factor
0.833
1.000
0.872
0.872
1.318
Net
export subsidy factor
1.000
1.000
0.934
0.934
1.148
Net import subsidy factor
1.200
1.000
1.071
1.071
0.871
CPI
0.880
1.000
0.953
1.000
1.102
E
1.071
1.071
0.871