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The inclusion of non-Ricardian consumers is aimed at capturing the impact offiscal policy shocks on private consumption by introducing heterogeneity in consumers. This ismotivated by the failure of the permanent income hypothesis, showing that private consumptiondepends heavily on current income. Galí et al. (2007) show that an inclusion of non-Ricardianagents can reconcile the New Keynesian framework with existing empirical evidence: anincrease in consumption and real wages following the government spending shock.There is no consensus in the literature concerning the number of non-Ricardian agents inthe economy.
Estimates vary from 50% in Campbell and Mankiw (1989) for the US to 24–37%for Euro area estimated by Coenen and Straub (2005). 5 At the same time Marto (2014) estimatedthe share of non-Ricardian agents as equal to 58% for the Portuguese economy. As for Russia,5Here the estimates for posterior means are provided. These estimates are rather low, taking into account the factthat Coenen and Straub (2005) used the value of 0.5 as a mean of the prior distribution.5Tiffin and Hauner (2008) assume that 40% of Russian households are liquidity-constrained in theGIMF model calibrated for Russia. 6The importance of taking into account the existence of non-Ricardian agents, especiallywith an analysis of fiscal policy, is underlined by a series of theoretical devoted to an estimationof fiscal multipliers (Galí et al., 2007; Eggertsson and Krugman, 2012).
Although a wide rangeof theoretical research has investigated the size of fiscal multipliers, there is still a continuingdebate on the size of the government expenditure multiplier under the zero lower bound (ZLB).The two closest to the current research papers, Eggertsson and Krugman (2012) and RoulleauPasdeloup (2013), provide different evidence of the size of the multiplier in and out of the zerolower bound.Eggertsson (2011) illustrates that the effect of macroeconomic policies is different underZLB and under a positive interest rate.
In the former case the higher increase in the output can beobtained by policies aimed at stimulating aggregate demand, not aggregate supply. This result ofEggertsson (2011) was confirmed by research within the DSGE framework (see, e.g., Christianoet al., 2011; Cogan et al., 2009; Erceg and Lindé, 2010) where a higher multiplier under the ZLBwas also obtained.
Eggertsson and Krugman (2012) focus on the government expendituremultiplier under the ZLB in the framework of heterogeneous agents (borrower-saver model).They obtain the multiplier of the utility-enhancing government expenditures which exceeds 1under the ZLB. In this framework, apart from the standard demand-increasing effect of thepublic spending, government expenditures increase the output through the channel of liquidityconstrained borrowers (non-Ricardian) who consume all their disposable income.Meanwhile, Roulleau-Pasdeloup (2013) analyses the government expenditure multiplier,taking into account the structure of public spending: namely, productive and utility-enhancingtypes of government expenditures.
The former was shown to gain a higher share in the totalgovernment expenditures during the recessions (Bachmann and Sims, 2012). As opposed to theresults of Eggertsson and Krugman (2012), Roulleau-Pasdeloup (2013) has found the fiscalmultiplier to be lower in the case of an excess-savings liquidity trap than under a positive interestrate.
He showed that for a high share of productive spending in total expenditures privateconsumption is crowded out by productive government spending, and the multiplier can evenbecome negative. Chapter 2 is devoted to an analysis of the short-term government spendingmultiplier on the basis of an extended borrower-saver model of Eggertsson and Krugman (2012)by incorporating public investment along with utility-enhancing public spending. The developedframework, therefore, combines the introduction of debt-constrained consumers, which is known6Global Integrated Monetary and Fiscal model (GIMF), presented in Kumhof, Laxton (2007, 2009, 2013), Kumhofet al.
(2009, 2010).6to increase the multiplier (Galí et al., 2007; Eggertsson and Krugman, 2012) with an assumptionabout productive government expenditures that reduce the multiplier under the ZLB (RoulleauPasdeloup, 2013).Objectives of the researchThe objective of this research is to define the impact of non-Ricardian agents on fiscalpolicy efficiency and optimal taxation, when unbalances of the pension system have a directimpact on the public finance.With this aim, the following goals were achieved:•To provide a brief overview of the design of existing pension systems, underlining animportant role played by public mandatory pension provision in securing an adequate levelof income at the retirement and forecast future public expenditure on pensions, whichconstitutes a significant part of total government expenditure.•To estimate how several pension reforms planned by the Russian government will impactthe value of public spending on retirement pensions with respect to the sustainability ofpublic finance under different scenarios for economic and demographic development inRussia.•To define an impact of the share of non-Ricardian consumers on the value of fiscalmultiplier when the structure of government spending (productive and non-productive) istaken into account, under two interest rate policy regimes: positive interest rate and zerolower bound.•To construct a theoretical overlapping generations model with unbalanced pay-as-you-gopension system where the deficit of the pension fund is covered by the government to takeinto account the link between public balance and characteristics of the pension system.•To define the optimal combination of traditional fiscal policy instruments andcharacteristics of the pay-as-you-go pension system when the deficit of the pension fund iscovered by the government.•To estimate an impact of the population structure, namely the share of non-Ricardianagents, on the optimal choice of fiscal instruments.MethodologyTo forecast future public expenditure on the provision of retirement pensions in Chapter 1an empirical model was developed, which accounts for possible size and coverage of pensionindexation, possible increase of the retirement age, forecasted age and gender structure of thepopulation and the rate of economic growth.
The estimations are based on three official7demographic forecasts of Rosstat. 7 The considered pension reforms and rates of economicgrowth conform to those assumed in the forecasts of the Ministry of Economic Development.Chapter 2 focuses on the theoretical definition of the fiscal multiplier and the economicconditions under which fiscal policy is more effective in increasing output. The frameworkdeveloped in Chapter 2 combines the introduction of non-Ricardian agents, which is known toincrease the fiscal multiplier (Galí et al., 2007; Eggertsson and Krugman, 2012), with anassumption about productive government expenditures, that lowers the multiplier under the ZLB(Roulleau-Pasdeloup, 2013). Two interest rate regimes are considered: positive interest rate andthe existence of ZLB constraint on nominal interest rate.The methodology of research in Chapter 3 is based on the overlapping generations model(OLG) in continuous time with an infinite horizon and uncertainty about the time of death,developed by Heijdra and Bettendorf (2006).
8 Their model is based on the framework originallydeveloped in Yaari (1965) and Blanchard (1985) and extended further by Buiter (1988), Weil(1989) and Bovenberg (1993). In order to investigate the optimal fiscal policy mix, the model ofHeijdra and Bettendorf (2006) was extended to incorporate the unbalanced pay-as-you-gopension system in a closed economy with an endogenous interest rate.
This allows accounting foran impact of fiscal instruments on the dynamics of capital accumulation and the level of effectivecapital in the equilibrium. The model incorporates two types of agents, Ricardian and nonRicardian consumers (Galí et al., 2007). On the basis of this model, an analytical representationof social welfare function was derived to define socially optimal fiscal policy, namely an optimalcombination of income tax and social contributions. Due to the fact that this class of models doesnot allow the derivation of an analytical representation of steady-state, the model is calibratedusing the parameter values applied in the literature on the subject, and a comparison of equilibriafor different characteristics of pension system is made. Computation of the model is conducted inMatlab.Contribution•In Chapter 1 the approach for forecasting public spending in Russia was developed, takinginto account the main economic characteristics and the nature of recent and plannedpension reforms.
The model takes account of the forecasted gender and age-specificstructure of the Russian population, the growth rate of the economy, the level of pensionindexation, possible renewal of pension indexation for working retirees and an increase inthe retirement age.78Russian Federation Federal State Statistics Service (Rosstat).The model takes into account the decreasing with age labor productivity (Blanchard, 1985).8•In Chapter 2 the New-Keynesian model with non-Ricardian agents was extended foranalysis of an impact, not covered in the existing literature, of the share of non-Ricardianagents on the value of fiscal multiplier.
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