Financial Sector’s Role in Transmission of Monetary and Fiscal Shocks in Russian Economy: Estimation Under Different Assumptions About Production Sector

Samvel S. Lazaryan () and Maria A. Elkina ()
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Samvel S. Lazaryan: Financial Research Institute, Moscow 127006, Russian Federation
Maria A. Elkina: Financial Research Institute, Moscow 127006, Russian Federation

Finansovyj žhurnal — Financial Journal, 2021, issue 6, 25-53

Abstract: The financial sector plays a crucial role in the economy, not only being a simple intermediary between creditors and borrowers, but also having a significant impact on the economy’s development and its various characteristics. For this reason, accounting for financial sector peculiarities is critical when developing policy-oriented general equilibrium models for practical use. This drives the interest of many researchers in development of approaches to describing the financial sector and financial frictions in DSGE models. In financial frictions models one can describe the production side of the economy in a simplistic way. However, it could be important to model the production sector in more detail. For instance, separating tradable and non-tradable sectors of the economy could be of great significance, especially for developing economies which depend on foreign trade a lot. In this paper we analyze the role of the financial sector and how important it is for transmission of monetary and fiscal shocks under different assumptions about the production sector. Namely, we compare two-sector economy with tradable and non-tradable sectors with a simplistic model which assumes that the economy produces only tradable goods. According to the results, financial frictions impact tradable and nontradable sectors asymmetrically. In the two-sector model the effect of financial frictions is quantitatively smaller than in the one-sector economy. Therefore, using the latter simplifying assumption could lead to overestimating the role of financial frictions in the transmission of monetary and fiscal shocks. In addition, the paper provides estimates of how changes in monetary and fiscal policy instruments impact the Russian economy given the existence of financial frictions.

Keywords: financial sector; financial accelerator; financial frictions; fiscal policy; monetary policy; DSGE model (search for similar items in EconPapers)
JEL-codes: E52 E60 E62 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:fru:finjrn:210602:p:25-53

DOI: 10.31107/2075-1990-2021-6-25-53

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