Analyzing Fiscal Multipliers in the Russian Federation Using a DSGE Model With Jaimovich-Rebelo Preferences

This paper proposes a DSGE model for the Russian economy with a new specification in which the utility function of Ricardian households is described using Jaimovich-Rebelo preferences to reduce the impact of the income effect on labor supply. Along with Ricardian households, the model also considers non-Ricardian households that consume all their current income. The DSGE model depicts a small open economy that consists of two production sectors: domestic and export. The model is realistically calibrated and provides a qualitative analysis of differences in fiscal multipliers under varying conditions for the economy’s functioning in order to identify the impact of different versions of the utility function on the transmission of fiscal policy. Further econometric assessment of the model’s parameters would be required to obtain more accurate estimates of the fiscal multipliers. The conclusion is that, under free flow of capital, government spending on final consumption of goods and services results in multipliers greater than one if the increase in government spending is short-term (1 to 2 quarters), or if the central bank responds to a fiscal shock with monetary stimulus. For public investment and transfers, the multipliers are systematically less than one because much of this expenditure is spent on imports. With strict limits on the movement of capital, the situation changes dramatically; the multipliers for all the types of government spending considered when an increase in it is sustained for one year comes to about 1.5. However, a strong GDP response to government spending shocks typically has serious inflationary consequences. Therefore, the high inflation and rapid recovery of GDP with some signs of overheating observed in recent years can be qualitatively attributed to an expansive fiscal policy in the presence of restrictions on the movement of capital.

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