The Ararat Fiscal Strategy Model: A Structural Framework for Fiscal Policy Analysis in Armenia

IMF Working Papers, June 10, 2022

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Canonical URL: The Ararat Fiscal Strategy Model: A Structural Framework for Fiscal Policy Analysis in Armenia

Authors: Victoria Babajanyan, Daniel Baksa, Martin Fukac, Eduard Hakobyan, Arshaluys Harutyunyan, Narek Karapetyan, Babken Pashinyan, Garik Petrosyan, Luis-Felipe Zanna
Published: June 10, 2022
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400210754.001

The Ararat Fiscal Strategy Model (AFSM) is a structural, New-Keynesian, DSGE, small open economy model.
AFSM contains a rich fiscal block that includes several expenditure and revenue instruments, and types of debt.
AFSM is a formal part of the Ministry of Finance analytical toolkit for macroeconomic fiscal policy scenario analysis, feeding into policy discussions, budget planning, and the Medium-Term Expenditure Framework.

Application 1: Assessment of the macroeconomic impact of the “first wave” of the Covid-19 pandemic on the Armenian economy, including mitigating effects of policy responses.
Application 2: Analysis of the 2018 public investment under-execution, highlighting the role of public investment efficiency on macroeconomic and fiscal outcomes.

Potential impact in 2020:
- Decline in GDP of 12.9 percent.
- Decline in consumption of 11.7 percent.
Cumulative output loss:
- Cumulative loss of GDP of 38 percent for the period 2020-2023.
Fiscal outlook deterioration:
- Public debt-to-GDP ratios could increase by 18.8 percentage points over 2020-23.
Policy response effectiveness:
- A package of counter-cyclical fiscal measures of 3.6 percent of GDP was estimated to cushion the 2020 GDP decline by almost 2 percentage points and to protect jobs.

Use AFSM as an operational tool within the Ministry of Finance for:
- Macroeconomic fiscal policy scenario analysis.
- Informing budget planning and the Medium-Term Expenditure Framework.
Deploy counter-cyclical fiscal measures in crisis episodes:
- A counter-cyclical package sized at 3.6 percent of GDP materially reduced the simulated 2020 GDP decline and supported employment.
Improve public investment efficiency:
- AFSM application on 2018 under-execution underscored that improving the efficiency of public investment yields positive macroeconomic and fiscal effects.

Subjects: Consumption, Current spending, Expenditure, Fiscal policy, National accounts, Public debt, Public investment spending
Keywords: AFSM application, AFSM simulation, Armenia, Consumption, Covid-19, Current spending, DSGE model, financial programming, fiscal policy multiplier, fiscal rules, Global, overview of the Ararat Fiscal Strategy Model, Public investment spending, scenario analysis, shock decomposition, Structural model

IMF Working Papers 2022, 118 (June 10, 2022).