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© 2022 International Monetary Fund WP/22/118

IMF Working Paper

Institute for Capacity Development

The Ararat Fiscal Strategy Model: A Structural Framework for Fiscal Policy Analysis in Armenia

Prepared by Victoria Babajanyan, Daniel Baksa, Martin Fukač, Eduard Hakobyan, Arshaluys Harutyunyan, Narek Karapetyan, Babken Pashinyan, Garik Petrosyan and Luis-Felipe Zanna^*

Authorized for distribution by Paul Cashin

April 2022

ABSTRACT: This paper presents an overview of the Ararat Fiscal Strategy Model (AFSM), which is a structural, New-Keynesian, DSGE, small open economy model with a rich fiscal block that includes several expenditure and revenue instruments, and types of debt. The AFSM is now a formal part of the Ministry of Finance analytical toolkit to do macroeconomic fiscal policy scenario analysis, which feeds into policy discussions, budget planning, and the Medium-Term Expenditure Framework. The model was applied to assses the macroeconomic impact of the “first wave” of the Covid-19 pandemic on the Armenian economy, including the mitigating effects of policy responses. AFSM simulations revealed a potential severe impact in 2020, with declines in GDP and consumption of 12.9 and 11.7 percent, respectively, and a cumulative loss of GDP of 38 percent for the period 2020–2023. They also highlighted a significant fiscal outlook deterioration that would increase public debt-to-GDP ratios by 18.8 percentage points over 2020–23. The package of counter-cyclical fiscal measures of 3.6 percent of GDP, however, was estimated to cushion the 2020 GDP decline by almost 2 percentage points, as well as protect jobs. A second AFSM application related to the 2018 public investment under-execution showed the importance of improving the efficiency of public investment to have positive macroeconomic and fiscal effects.

JEL Classification Numbers:	E37, E47, E62, F34, O11.
Keywords:	Structural model; DSGE model; fiscal rules; scenario analysis; financial programming; Armenia; Covid-19.
Author’s E-Mail Address:	victoriasbabajanyan@gmail.com; dbaksa2@imf.org; mfukac@gmail.com; eduard.hakobyan@minfin.am; arshaluys.harutyunyan@minfin.am; narek_karapetyan@minfin.am; babken.pashinyan@minfin.am; garik.petrosyan@minfin.am; fzanna@imf.org.

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JEL Classification Numbers:	E37, E47, E62, F34, O11.
Keywords:	Structural model; DSGE model; fiscal rules; scenario analysis; financial programming; Armenia; Covid-19.
Author’s E-Mail Address:	victoriasbabajanyan@gmail.com; dbaksa2@imf.org; mfukac@gmail.com; eduard.hakobyan@minfin.am; arshaluys.harutyunyan@minfin.am; narek_karapetyan@minfin.am; babken.pashinyan@minfin.am; garik.petrosyan@minfin.am; fzanna@imf.org.

Title Page

WORKING PAPERS

The Ararat Fiscal Strategy Model: A Structural Framework for Fiscal Policy Analysis in Armenia

Prepared by Victoria Babajanyan, Daniel Baksa, Martin Fukač, Eduard Hakobyan, Arshaluys Harutyunyan, Narek Karapetyan, Babken Pashinyan, Garik Petrosyan and Luis-Felipe Zanna ¹

Contents

• 1. Introduction

• 2. Key Characteristics of the Armenian Economy

  • 2.1. Macroeconomic Characteristics

  • 2.2. Policy Characteristics

• 3. The Model Structure

  • 3.1. Household Sector

  • 3.2. Production Sector

  • 3.3. Government Sector

  • 3.4. External Sector

  • 3.5. Aggregate Resource Constraints and Definition of Equilibrium

• 4. Model Parametrization

• 5. Capturing the Fiscal Rules Taxonomy of Armenia

• 6. Policy Scenario Applications

  • 6.1. An Assessment of the First Wave of the Covid-19 Pandemic

  • 6.2. Comparing Alternative Policies Under Public Investment Under-Execution

• 7. Final Remarks

• References

• TABLES

• 1. Calibration

• 2. The Great Ratios and Selected Fiscal Statistics (percent of GDP)

• 3. Fiscal Policy Multipliers

• 4. The Net Impact of the Fiscal Package on GDP and Components

• FIGURES

• 1. Contributions of Sectors to GDP Growth

• 2. Expenditures of the Gross Domestic Product

• 3. Inflation and Exchange Rate Developments

• 4. Fiscal Developments

• 5. Government Debt Developments and Structure

• 6. The Structure of the AFSM

• 7. The Fiscal Speed Limit Monitor

• 8. Gains in Real GDP due to Fiscal Policy

• 9. Real GDP Shock Decomposition

• 10. Public Debt Shock Decomposition

• 11. The Impact of the Covid-19 Pandemic on the Macroeconomy

• 12. The Impact of the Covid-19 Pandemic on Fiscal Stance and Public Debt

• 13. Baseline Scenario: Macroeconomic Outcomes

• 14. Baseline Scenario: Prices, Interest and Exchange Rates

• 15. Debt Repayment (Alternative): Macroeconomic Outcomes

• 16. Debt Repayment (Alternative): Fiscal Outcomes

• 17. Increasing Social Benefits (Alternative): A Social Transfer Increase

• 18. Increasing Social Benefits (Alternative): Macroeconomic Outcomes

• 19. Increasing Social Benefits (Alternative): Fiscal Outcomes

• 20. Increasing Public Investment Efficiency (Alternative): GDP and Fiscal Outlook