Fiscal Reform in the Republic of Moldova. Stochastic Dynamic General Equilibrium (SDGE) simulation

Vîntu, Denis (2021): Fiscal Reform in the Republic of Moldova. Stochastic Dynamic General Equilibrium (SDGE) simulation. Published in: Munich Personal RePEc Archive , Vol. 1, No. 10.10.2021 (12 May 2021): 0-15.

Abstract

The article describes a dynamic general equilibrium for the Republic of Moldova, in the context of declining oil prices and COVID-19. We try to introduce an intergenerational model with the stochastic component, where we describe each self-employed agent, rather we try to adapt the model in a simulative tax reform, a transition from the progressive system that currently we have to a flat tax. For our hypothesis, it is assumed that there are 4 cohorts of population, selected by level of education (secondary, high school, university and lifelong learning) that pay taxes in a system based on social solidarity. Thus, the first conclusions can be drawn, namely that the tax system with 4 different rates 12, 15, 19 and 23% is the one that best approaches the Pareto type optimum, as opposed to the flat tax, which respects dynamic equilibrium. Public budget revenues are simulated in IS-LM-Laffer framework. And the forecast of budget accumulation is made using 4 distinct prediction models: naïve random walk, ARIMA, univariate model (AR) and vector error correction model (VECM). In addition, the main result is placed on the hypothesis that the empirical testing suggest that, unlike complicated models that have difficulty overcoming naïve random walk imitation, using techniques of associating and including monetary and fiscal indicators in linear regression, as well as adding structural shapes, some parameters of the models are quite significant. Of these, it seems that the closest to the economic reality of the country is the univariate model (AR), being also the most relevant for predicting the out-put gap, but also the stochastic component: the basic interest rate of the NBM's monetary policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: fiscal reform, monetary policy, cross-country convergence, prediction and forecasting methods, dynamic general equilibrium model, Pareto optimal balance, ARIMA modeling, time series analysis, Box – Jenkins method.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C10 - General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E23 - Production; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

References

Altig, D., Auerbach, A., Kotlikoff, L., Smetters, K. & Walliser, J. (2001): “Simulating Fundamental Tax Reform in the United States,” The American Economic Review, Vol. 91, No. 3

Altig, D. & C. T. Carlstrom (1999): ““Marginal Tax Rates and Income Inequality in a Life-Cycle Model.,” American Economic Review, December 1999, 89(5), pp. 1197–1215.

Auerbach, A., Jagadeesh G. & L. J. Kotlikoff (1997): “The Future of Fundamental Tax Reform and Macroeconomic Performance,” American Economic Review, 87 (May 2), 143–46.

Blanchard, Olivier J., Debt, Deficits, and Finite Horizons, Journal of Political Economy, Vol. 93, (1995), pp.223-247

Bovenberg, A.L., Invetment Promoting Policies in Open Economies: The Importance of Intergenerational and International Distributional Effects, Journal of Public Economies, Vol. 51, (1993), pp.3-54.

Diamond, Peter A., National Debt in a Neoclassical Growth Model, American Economic Review No.55, (1965), pp.1126-1150.

González-Torrabadella, M. & Pijoan-Mas, J. (2006): “Flat Tax Reforms: a General Equilibrium Evaluation for Spain,”

Ji-Taek SEO, Hajime INAMURA and Asao ANDO (Economic Effects of Tax Reform in an Overlapping-Generations Model.

Ramsey Frank P. , A Mathematical Theory of Saving, Economic Journal 38, no. 152, (1928), pp.543-359.

Romer David, Advanced macroeconomics, University of California, Berkeley, (2001), pp.1-90.

Robert Solow, A Contribution to The Theory of Economic Growth, Quarterly Journal of Economics, 70, (1956), pp.64-94.