Public investment as a growth driver for a commodity-exporting economy: Sizing up the fiscal-monetary involvement

Serhii Shvets; Serhii Shvets

doi:10.3934/NAR.2024005

National Accounting Review

2024, Volume 6, Issue 1: 95-115. doi: 10.3934/NAR.2024005

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Research article

Public investment as a growth driver for a commodity-exporting economy: Sizing up the fiscal-monetary involvement

Serhii Shvets ^,

Department of Modeling and Forecasting of Economic Development, State Agency "Institute for Economics and Forecasting, " National Academy of Sciences of Ukraine, 26, Panasa Myrnoho, Kyiv, 01011, Ukraine

Received: 17 October 2023 Revised: 25 January 2024 Accepted: 31 January 2024 Published: 06 March 2024
JEL Codes: H54, H12, E61, C31

The study presents a solution to maximize public investment as a growth driver for commodity-exporting economies. The solution is to compensate for the low efficiency of public investment by drawing on internal and external factors within an active fiscal and monetary policy framework. For this, the paper introduces a quantitative model that implements a golden rule of public finance in a resource boom backed by a sovereign wealth fund under an active monetary policy stance. The modeling results show that mobilizing windfall resource revenues to finance increased public investment can limit a crowding-out effect through proper resource allocation and change the sectoral structure in favor of the final goods sector. As confirmed by the sensitivity analysis, the low efficiency of public investment can be partially offset by a less restrictive monetary policy response to fiscal dominance, but this leads to excessive volatility in financial indicators. However, if the public debt burden is an issue due to a more robust fiscal dominance regime, a higher tax rate on exported raw materials can be used to maintain sustainability. By developing a policy goals domain, the paper initiates a discussion that can direct policy recommendations toward a promising growth path by maximizing the public investment driver in the complex policy environment of fiscal-monetary interaction.
- public investment,
- commodity cycles,
- fiscal policy,
- monetary policy,
- fiscal-monetary interaction,
- DSGE modeling
Citation: Serhii Shvets. Public investment as a growth driver for a commodity-exporting economy: Sizing up the fiscal-monetary involvement[J]. National Accounting Review, 2024, 6(1): 95-115. doi: 10.3934/NAR.2024005

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Abstract

The study presents a solution to maximize public investment as a growth driver for commodity-exporting economies. The solution is to compensate for the low efficiency of public investment by drawing on internal and external factors within an active fiscal and monetary policy framework. For this, the paper introduces a quantitative model that implements a golden rule of public finance in a resource boom backed by a sovereign wealth fund under an active monetary policy stance. The modeling results show that mobilizing windfall resource revenues to finance increased public investment can limit a crowding-out effect through proper resource allocation and change the sectoral structure in favor of the final goods sector. As confirmed by the sensitivity analysis, the low efficiency of public investment can be partially offset by a less restrictive monetary policy response to fiscal dominance, but this leads to excessive volatility in financial indicators. However, if the public debt burden is an issue due to a more robust fiscal dominance regime, a higher tax rate on exported raw materials can be used to maintain sustainability. By developing a policy goals domain, the paper initiates a discussion that can direct policy recommendations toward a promising growth path by maximizing the public investment driver in the complex policy environment of fiscal-monetary interaction.

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