Abstract
In this study, we assess the effects of the structural shocks on the external debt sustainability in Mongolia, based on an estimated small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model with the traded, the non-traded, and the mining sectors. The impulse response results show that the traded sector’s productivity shock, the commodity price shock, the mining output shock, and the foreign interest-rate shock have a decreasing effect on external debt accumulation in Mongolia, whereas the non-traded sector’s productivity shock, the household preference shock, and the government spending shock have an increasing effect on the same. Furthermore, we assess Mongolia’s external debt sustainability under the COVID−19 pandemic shock. Under our assumed pandemic scenario, Mongolia’s external debt will increase by 30% from its steady state over the next 10–28 quarters. Our recommended solution in this study is to develop the traded sector, instead of the mining sector, to maintain sustainability of the external debt and to decrease vulnerability of the economy.
Highlights
In this study, we assess the effects of the structural shocks on the external debt sustainability in Mongolia, based on an estimated small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model with the traded, the non-traded, and the mining sectors
The defining feature of the current state of the Mongolian economy is the recent boom in the mining sector as well as in external indebtedness (Figure 1)
The model structure applied in Li et al [5] is similar to that of average low-income countries (LICs) [6], Central African Economic and Monetary Community (CEMAC) and Angola [7], and for average LICs [8]
Summary
While Mongolia’s mining sector has been experiencing a boom, its external debt has been increasing substantially over the last decade. The purpose of this study is to assess the factors influencing external debt sustainability in Mongolia by constructing and estimating a small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model that incorporates the most important features of the Mongolian economy. The model structure applied in Li et al [5] is similar to that of average low-income countries (LICs) [6], Central African Economic and Monetary Community (CEMAC) and Angola [7], and for average LICs [8] These DSGE models incorporate features of resource-rich LICs, such as sovereign wealth funds and government capital. We build an estimable DSGE model reflecting current features of the Mongolian economy, identify the structural shocks using the Bayesian estimation method and assess the structural shocks’ effect on the external debt sustainability of Mongolia. We assess Mongolia’s external debt sustainability under the COVID−19 pandemic shock by incorporating multiple structural shocks into our estimated DSGE model
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