Belarusian Economic Research and Outreach Center

Working Papers

The influence of financial stress on economic activity and monetary policy in Belarus

The paper determines episodes of financial stress in Belarus during 2004-2016 period using constructed financial stress index, and offers an analytical framework to evaluate the influence of financial turmoil on Belarus's economy, in particular economic activity and monetary policy. The findings show evidence of two episodes of financial stress and two episodes of recessions in Belarus during studied period. The results from the estimated ARDL models show that high level of financial stress causes the substantial downturn in economic activity of Belarus. Moreover, the results of Toda and Yamamoto causality analysis indicate that higher financial stress in Belarus has led to lower economic activity that caused higher inflation, which in turn led to higher policy rate introduced in order to constrain inflation in Belarus. Finally, from theoretical point of view results also signify that there is no evidence for the support of the conventional wisdom hypothesis in Belarus since 2004. Therefore, price stability is not a sufficient condition to support financial stability in Belarus and should certainly be addressed independently of the objective of price stability of the National Bank of Belarus.

 Dzmitry Kruk

SVAR Approach for Extracting Inflation Expectations Given Severe Monetary Shocks: Evidence from Belarus

Inflation expectations play a crucial role for macroeconomic dynamics and more specifically for monetary environment. However, inflation expectations is an unobservable variable. So, the quality of the correspondent measure in a great extent predetermines its feasibility for macroeconomic analysis. Today, survey-based measures of inflation expectations prevail in macroeconomic analysis. However, the drawbacks and/or unavailability of such measures give a rise to other identification strategies. Extracting inflation expectations from the actual data (e.g. series of interest rate and actual inflation) basing on SVAR identification approach has become a valuable alternative/supplement for measuring inflation expectations. In this paper I show that the existing strategy of inflation expectations identification through SVAR approach is very sensitive to the state of monetary environment. When a monetary environment is unstable (e.g. high and volatile inflation), the assumptions of the baseline approach are not hold, and it produces biased estimations. I emphasize two sources of this bias in estimations and suggest procedure for obtaining unbiased estimates. My identification strategy includes a number of steps. I suggest applying Markov regime-switching framework for extracting an unbiased mean for ex ante real interest rate. Further, I use two-stage SVAR identification strategy. First, I identify an unexpected shock to actual inflation, which is crucial for obtaining a proper measure of inflation expectations. Further, I net the series of ex post interest rate from this ‘noise’. Second, I run a baseline SVAR procedure, for which I use the data adjusted at the first step. Finally I obtain an unbiased and informatively rich series of inflation expectations.

Current Gender Trends in Belarusian Labor Market: Wage Gap, Child Penalty and Marriage Premium

The issue of gender equality in Belarus labor market is still unclear. On the one hand the rate of female participation is high. At the same time there is evidence of the rising gender pay gap that grew from 16.5% in 2005 to 24% in 2014. The decomposition of the wage gap during 2005- 2014 time period using Oaxaca-Blinder, Juhn-Murphy-Pierce and Machado-Mata techniques revealed that differences in income function (the difference in a way efforts of men and women are remunerated) are the main factors affecting the growth of gender inequality, while the personal characteristics are losing the influencing power. The role of the factors differs depending on the quantile of income distribution. I also find no association between wages and marriage for females, while there is a 10.5% wage premium in case of married males. The parenthood wage penalty is attributed to women and equals approximately 14.4%. Moreover, children from 0 to 6 provide the most severe drop in wages. In addition, the paper reveals that educated women are suffering the most and face 20.4% decline in wages, while penalty for women with the secondary school or lower amounts to just 8%.

 Kateryna BornukovaDzmitry Kruk, Gábor Hunya, Rumen Dobrinsky, Olga Pindyuk, Amat Adarov, Peter Havlik

The Belarus Economy: The Challenges of Stalled Reforms

wiiw and BEROC study finds that the transition model of the past quarter century has reached its limits, and argues that policy changes are necessary if the system is to survive.

 Victor Arshavskiy

Design of Debt Covenants and Loan Market Conditions

When a debt covenant is violated the lender has the right to demand immediate repayment of the loan. Using this right, the lender can extract certain concessions from the borrower (manager), which may be inefficient. I propose a theory that explains why, despite this inefficiency, tight and often violated debt covenants may be optimal. In a repeated moral hazard problem combined with an incomplete contract set-up, the debt overhang prevents the manager from exercising optimal effort. I deviate from the standard incomplete contract set-up by allowing outside market participants to observe the uncontractable outcome. I model the manager's outside option as the opportunity to refinance his debt on a competitive loan market. In this situation, the market independently evaluates the manager's performance based on observable parameters. The value of the outside option has an important impact on the covenant design. A strict covenant will severely punish the manager if his outside option is low. If the covenant is violated the lender will have control over the manager's assets and the manager will face a renegotiation game in which the lender has all the bargaining power. In this case a high outside option allows the manager to retain some rents. The manager will exercise effort to increase his chances to have a high outside option.

Does Safeguards Need Saving? Lessons from the Ukraine - Passenger Cars Dispute

The Panel Report in Ukraine - Passenger Cars provides an opportunity to revisit an old debate over the role of safeguard measures in the WTO. With regard to the legal findings, the panel followed the established jurisprudence in this area, and found a number of violations of the Safeguards Agreement. With regard to the economics, we delve more deeply into the economic and political background of the safeguards investigation. Ukraine was hit by the economic crisis shortly after its WTO accession that significantly liberalized import tariffs on passenger cars. Next, we offer a de novo look at the injury and causation issues in this case, and discuss the challenges of an industry reliant on offshored production that sees a safeguard as a mechanism to attract FDI for production. We conclude with an assessment of the operation of the WTO’s safeguards regime, along with some tentative suggestions for reform. Overall, our examination of the economic analysis by the investigating authority and the legal review by the WTO panel raises questions about particular aspects of the domestic and WTO processes, but concludes that the system worked well in this case.

The Tax System of Belarus

This paper provides a comprehensive analysis of taxation in Belarus. I compare the dynamics of the tax rates and the tax revenue in Belarus to the world averages and to other countries of the Eurasian Union. The paper studies the the harmonization of the rates within the union and the efficiency of tax collection. Finally, the two possible reforms of taxation in Belarus and its possible consequences are discussed: an increase of VAT; reintroduction of the progressive personal income tax.

Spatial wage inequality in Belarus

This paper studies the wage inequality in Belarus' districts from 2000 till 2015 following the multi-step and multi-mechanism framework. The empirical results show: first, that wage disparities across the districts decreased in the 2000-2012 period and then increased from 2013 to 2015; second, there is the spatial dependency in district wages and increasing separation between districts, and between rural and urban population in Belarus; third, the main economic factors that contribute to decrease in district wage inequality are industrial development, retail trade and agricultural development. Finally, from theoretical point of view this research rejects the inverted U-shaped relationship between spatial inequality and economic development for Belarus and supports the hypothesis made by French economist Thomas Piketty that slow growth rates lead to rising inequality.

22 may 2016 Александр Ващилко

Effects of Trade Wars on Belarus

This paper looks at the effects of the trade wars that followed 2014 events in Ukraine on Belarus. The estimation of the model predicts the increase in the tarif revenue collected by Belarus. Because of ban on imports, the tari¤ revenue of Russian Federation declines. Being a part of Customs Union, Belarus needs to participate in the tarif revenue redistribution. The need to participate in the tarif revenue redistribution and the decline in the tarif revenue collected by Russian Federation lead to the decrease in the welfare of Belarus. To avoid this decrease, Belarus should argue for the modi…cation of the redistribution schedule.

Effects of Population Ageing on the Pension System in Belarus

Belarus currently has a relatively generous pay-as-you-go pension system, but population aging coupled with recent problems with economic growth will soon make it unsustainable. We build a rich OLG model of Belarusian economy, which shows that without reform the Pension Fund will run into persistent and growing deficit, which will reach 9 per cent of GDP by 2055. We also compute the fiscal projections of several parametric pension reforms.