Depreciation Model Case of Russia and Kazakhstan

1. Depreciation Model Case of Russia and Kazakhstan May 02 2014 MavzunaTuraeva, Kwang Jae Sung • GAMS MODEL PROJECT • SPRING 2014

2. Introduction • Russia’s devaluation of currency • Subsequent trade shock in Kazakhstan due to a decrease in demand for their export in Russia • Monetary approach to recover the trade deficit affecting the smaller economy On February 11th 2014 the National Bank of Kazakhstan has decided to stop maintaining the value of tenge at the previous level by reducing the volumes of trades in the foreign exchange market and interference in the process of tenge exchange rate formation. In his statement the chairman of NBK laid out several reasons why the National Bank decided to stop maintaining the value of tenge at the previous levels among which was Russian rouble remains volatile. In 2013 the Central Bank of the Russian Federation adopted a freer exchange rate and the value of rouble weakened by 7.1% against U.S. dollar. • Demonstrate trade tax symmetry theorems using GAMS model • Construction of a GAMS model simulating the depreciation of currency under different scenarios

3. Introduction - theorems Theorem 2 An a percent change in the tax factor on any balance of payments item is symmetric to a - a percent change in the subsidy factor on it and. an a percent change in both the tax and subsidy factors on it is neutral. Theorem 6 The Generalized Meade-Ruffin Symmetry Theorem An a percent change in all net tax factors on non-monetary credits combined with an a percent change in all net subsidy factors on non- monetary debits is symmetric to an a percent change in the price of domestic currency. Theorem 7 The Generalized Meade-Ruffin Neutrality Theorem An a percent change in all net tax factors on non-monetary credits combined with an a percent change in all net subsidy factors on non- monetary debits and an a percent appreciation of the domestic currency is neutral.

4. Reference The Balance of Payments Approach to Trade Tax Symmetry Theorems Author(s): William H. Kaempfer and Edward Tower Source: WeltwirtschaftlichesArchiv, Bd. 118, H. 1 (1982), pp. 148-165 Published by: SpringerStable URL: http://www.jstor.org/stable/40439007 . Accessed: 21/02/2013 08:40

5. Methodology • Two-country model: Russia and Kazakhstan • Endowment Economy • Two commodities produced (Commodity 1: Mineral / Commodity 2: Consumer products) • Analysis from the smaller economy’s perspective • (Kazakhstan: Country A, Russia: Country B) • a. prices of Kazakhstan goods are fixed at the world prices • b. Kazakhstan uses the proceeds from exports in order to pay for imports • Trade balance is exogenous

6. Parameters

7. Initial Values

8. Variables

9. Equations

10. Different Scenarios • Scenario I. Demonstration of Theorem 2 • Increase of import subsidy by 20% Increase of both import subsidy and tax by 20% • An a percent change in the tax factor on any balance of payments item is symmetric to a - a percent change in the subsidy factor on it and. an a percent change in both the tax and subsidy factors on it is neutral • Scenario II. Russian depreciation of currency by 7.1% • Scenario III. Demonstration of Theorem 6 • An a percent change in all net tax factors on non-monetary credits combined with an a percent change in all net subsidy factors on non- monetary debits is symmetric to an a percent change in the price of domestic currency. • Scenario IV. Demonstration of Theorem 7 • An a percent change in all net tax factors on non-monetary credits combined with an a percent change in all net subsidy factors on non- monetary debits and an a percent appreciation of the domestic currency is neutral. • Scenario V. Kazakhstan’s depreciation of currency by 20%

11. GAMS Results