Abstract
The problem of fiscal dominance tends to be most pronounced in emerging markets. The research subject is the monetary policy of the Central Bank of the Republic of Armenia and its participation in solving fiscal problems. The aim of the article is to analyze and assess fiscal dominance in the macroeconomic regulation of Armenia. The methodological basis of the study is a review of theoretical and practical models of fiscal dominance known in the scientific literature, as well as applying the most optimal models to the Armenian economy. The authors conclude that the tasks of fiscal policy are the priority of macroeconomic management, and monetary policy aims to solve fiscal problems.
Highlights
The strategic goal of macroeconomic regulation is to achieve sustainable economic growth rate in terms of stable prices and national currency, low unemployment together with free capital flow
The analysis showed that inflation does not react to penditure and inflation for Armenia internal and external shocks, which means that it is not
If the Central Bank of Armenia stimulated the investment of the financial system in government securities by the Armenian government, using supervisory functions on the part of the internal debt, in our opinion, it is pursuing a policy of gimmicks on the external debt to maintain the exchange rate at a stable level, conceived to the detriment of the country’s export positions and the competitiveness of the domestic product in foreign markets, including the EAEU market
Summary
The strategic goal of macroeconomic regulation is to achieve sustainable economic growth rate in terms of stable prices and national currency, low unemployment together with free capital flow. Based on the analysis of the quarterly data of the primary balance sheet and the consolidated gross public debt of five developing countries in Europe (Hungary, Romania, Bulgaria, Serbia and Macedonia), the author built two regression models (Equation 3) that describe fiscal or monetary dominance in the economy. The equation describes the direct relationship between inflation and the state budget deficit of the country without considering the internal and external sources of financing the budget deficit The model with these parameters is as follows (Equation 9): CPIt = α0 + β1CBBt + β2BIBt + β4M2t + β5GDPt + β6PSt + β7MLTt + β8STLt + εt. In the case of fiscal dominance, the government can use mechanisms for monetizing the state budget deficit, which will definitely affect the independence of the monetary authorities in macroeconomic management.
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