The stylized, quarterly small open-economy model is not

meant to provide a quantitative analysis of the Kazakhstan’s economy, e.g., on the sources of

inflation, but is instead meant to provide economic intuition on the implications of the

current regime (and the alternative regimes we will consider in the next section) for the

domestic economy. The analysis here draws on recent work by Chamon et al. (2012) and

Benes et al. (2013).

The model presented here is not intended for forecasting purposes. The model consists of

a set of equations that determine the joint behavior of output, inflation, exchange rate,

interest rate, monetary aggregates, open market operations, and reserve accumulation. The

model does not include forward looking behavior, the absence of which simplifies the

solution of the model but comes at the expense of missing an important channel through

which monetary policy affects the economy—the expectations channel. This type of

tradeoff–abstracting from features that may be relevant but that would complicate the

analysis—is always present in any economic modeling.6 The focus in this paper is not on

forecasting but rather on understanding the macroeconomic implications of alternative policy

regimes. Hence, the need to replicate the properties of data is secondary to providing a

simple understanding of the mechanisms of interest. In addition, the focus is on one or two

relevant shocks, and not the whole spectrum of possible macroeconomic disturbances.

We do not formally model the periodic devaluations of the tenge. This is a shortcoming

of our approach, in that it does not take into account the use of devaluations as part of the

macro adjustment tools.7 However, by showing the implications of shocks for interest rates

and reserves under current and alternative exchange rate management frameworks, our

results help assess the viability of the various regimes. We leave a formal treatment of

periodic devaluations for future work.

Based on the structure of the Kazakhstan’s economy, we focus mainly on external

shocks. The economy is considered relatively small and open, and revenues stemming from

natural resources are the primary source of external funding. As international commodity

prices are subject to large fluctuations, the economy as a whole is exposed to sudden and

large changes in the balance of payments. In the model, these shocks can also be loosely

interpreted as changes in the external environment, e.g., changes in the risk appetite of

foreign investors, or as changes in the private sector expectations of a future devaluation.

Date: 2015-01-11; view: 1095