The authors would like to thank Emanuele Baldacci, Anna Bordon, Annalisa Fedelino, Mark Lewis, and Niklas Westelius for their helpful comments and suggestions. We are also grateful to seminar participants from the Ministry of Finance and the Central Bank of Armenia for their useful comments and discussion on an earlier draft of the paper. All remaining errors are ours.
Real quarterly GDP is adjusted seasonally using the Tramo/Seats program in EViews. Forecasts of real GDP for 2010 (IMF staff estimates) are used to partly overcome the end-point bias inherent to the HP filtering method.
The toolbox and codes to estimate the model were kindly provided by the IMF Research Department. We particularly thank Petar Manchev for his instructions on how to use this toolbox.
Estimating the model without capacity utilization and inflation expectations yielded similar results.
Standard errors are robust to heteroscedasticity and autocorrelation.
Gracia (2008) estimated the CAB for Armenia over the period 1998-2007 employing Hodrick-Prescott filter to estimate the output gap and a range of elasticities for tax revenues. The author concluded that fiscal policy since 2004 was pro-cyclical.
Since changes in interest payments affect the overall balance but are largely not a reflection of the government’s discretionary policy, we opted to assess the underlying fiscal stance based on the primary balance. For further details, see Fedelino et al. (2009).
In fact, unemployment benefits are very small in Armenia (less than 0.4 percent of current expenditures in 2008–09), and hence their impact is negligible.
Potential GDP is the appropriate scaling variable since the cyclically-adjusted primary balance measures what the fiscal balance would have been if output had been at its potential.
In a study by Davoodi and Grigorian (2007) that assessed the gap between the potential and actual tax collection in Armenia, the authors concluded that the gap could be as high as 6½ percent of GDP, and is largely due to institutional and governance weaknesses, and informality.
For instance, both the bottom and top personal income tax rates of 10 and 20 percent, respectively apply at relatively moderate to low income levels suggesting that the tax system places a heavy tax burden on low income households with little revenue for the system.
The ratio of public debt-to-GDP rose from 16 percent at end-2008 to 39 percent at end-2009.
Armenia adopted fiscal rules in 2008, under which the public debt may not exceed 60 percent of GDP in any given year, and if the ratio of public debt over the previous year’s GDP is above 50 percent, the deficit in the following year should be lower than 3 percent of the average GDP of the previous three years.