Download 1 - Sites@Duke

Depreciation Model
Case of Russia and Kazakhstan
May 02 2014
Mavzuna Turaeva, Kwang Jae Sung
GAMS MODEL PROJECT
SPRING 2014
Introduction
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
On February 11th 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.
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
1
Introduction - 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.
2
Reference
The Balance of Payments Approach to Trade Tax Symmetry Theorems
Author(s): William H. Kaempfer and Edward Tower
Source: Weltwirtschaftliches Archiv, Bd. 118, H. 1 (1982), pp. 148-165
Published by: SpringerStable
URL: http://www.jstor.org/stable/40439007 .
Accessed: 21/02/2013 08:40
3
Methodology
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
4
Parameters
Table A: Summary of parameters
Parameter
Alpha
Beta(I)
PW(I)
PD0(I)
U0
C0(I)
X0(I)
Q0
GDP0
is0
it0
es0
et0
Y0
TB0
Si0
Ti0
Te0
Se0
A0
RPD0
RPW0
E0
CPI0
Specification
Shift parameters in Utility
Share parameters in Utility
World Prices
Domestic Prices
Initial Utility level
Initial Consumption levels
Initial trade flows
Initial output levels
Initial GDP
Import subsidy
Import tax
Export subsidy
export tax
Initial Money Income
Initial Trade Balance
Import subsidy factor
Import tax factor
Export tax factor
Export subsidy factor
Border tax adjustment factor
Relative domestic price of import
Relative world prices
Exchange rate Tenge per Ruble
Inflation
5
Initial 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/Te0
Beta('1')=0.3
Beta('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/U0 6
Variables
Table C: Summary of variables
Variables
U
Specification
Utility
X(I)
Trade flow
C(I)
Consumption
GDP
GDP
PD(I)
Domestic prices
Y
Money income
TB
Trade balance
Ti
Import tax factor
Te
Export tax factor
RPD
Relative domestic price of import
RPW
Relative world price
A
Border tax adjustment factor
Is
Import subsidy
Se
Export subsidy factor
Si
Import subsidy factor
CPI
E
Inflation
Exchange rate (Tenge per Ruble)
7
Equations
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')/Te
Demand for minerals
Demand for consumer products
Material Balance for minerals
Material Balance for consumer products
Total Money Income
Trade Balance
Trade Equilibrium
Relative price in terms of tenge
Relative prices in terms of dollar
Border tax adjustment factor
C('1')*PD('1')=E=(BETA('1')/(1-BETA('1')))*C('2')*PD('2')
C('2')*PD('2')=E=Y-C('1')
X('1')=E=Q0-C('1')
X('2')=E=C('2')
Y=E=C('1')*PD('1')+C('2')*PD('2')
TB=E=X('1')-X('2')
TB=E=0
RPD=E=PD('2')/PD('1')
RPW=E=RPD/A
A=E=Ti/Te
Net import tax factor
Ti=E=(1+it0)/(1+is0)
Net export tax factor
Te=E=(1+et0)/(1+es0)
Net import subsidy factor
Se=E=(1+es0)/(1+et0)
Net export subsidy factor
Si=E=(1+is0)/(1+it0)
Inflation
CPI=E=Y/U
8
Different 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%
9
GAMS Results
Scenario 1
20% import subsidy
Variables
Level
Scenario 2
20% import subsidy &
20% import tax
Level
Scenario 3
Scenario 4
Ruble depreciation by Simultaneous
7.1% via proportionate appreciation of
change in export tax domestic currency
and import subsidy
Level
Level
Scenario 5
Depreciation of tenge
by 20%
Level
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 export
1.000
1.000
1.000
1.000
1.000
Domestic price of import
0.833
1.000
0.934
1.000
1.148
Money income
87.719
100
95.265
100
109.926
Trade 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
1.071
1.071
0.871
E
10