Fiscal or monetary stimulus? Evolutionary arguments for tax reforms

Abstract

The article deals with the problem of substantiation of the emergent economies development regulatory measures (fiscal and / or monetary), using the evolutionary modelling methods. For this purpose, the mathematical model was constructed that simulates the co-evolution process of the advanced and developing countries, linked by global value chains. In this model, each country is characterized by its original structure of economic entities, defined by the ratio of the egoistic enterprises (predisposed to conservative behaviour) to the altruistic enterprises (predisposed to innovation), as well as by specific population and demographic processes. The results of the computational experiments have shown that the success of economic regulation fundamentally depends on the peculiarities of the initial state of the institutional environment. In the institutional environment with the «transparent» long behaviour and, accordingly, a long economic planning horizon, the best result in the form of average annual production growth rate of the emergent economies is provided by the cheap money policy combined with the high European taxes. A different situation is observed in more realistic short behaviour and, accordingly, short (under 5 years) economic planning horizon. In this case, any tax policy (neither low nor high taxes) together with any money (neither cheap nor expensive), to a certain extent loses its significance, as the initially backward innovative system does not allow to quickly get good results, and the long-term benefits of the potential economic growth are not taken into consideration. However, low taxes and cheap money are important as they create better conditions for survival of the altruistic enterprises, facilitating their investment activities, which can multiply increase their technical performance and economic efficiency. Still, in the context of the evolutionary economics and following the conducted computational experiments, the fiscal policy in terms of emerging markets retains its regulatory capacity, and therefore requires further reforms in the context of the «new reality» based on the global value chains.

Anti-Crisis Fiscal Measures in the European Union during the COVID-19 Pandemic and their Impact on GDP

“…V. Vishnevsky and A. Polovyan [6] considered the difficulties of substantiation of fiscal and monetary measures used to regulate an emergent economy with the help of evolutionary modelling methods. The results of their computational experiments have shown that the success of economic regulation depends on the initial state of the institutional environment.…”

“…Leading analysts are making cautious predictions concerning the impact of the pandemic on the future of individual countries and global economy in general. For instance, in her report, Isabel Schnabel, Member of the Executive Board of the ECB, pointed out that the revisions to inflation expectations for the coming years have been limited and that any mid-point forecast therefore needs to be taken with a grain of salt 6 . IMF analysts have published guidelines for preparing the 2021 budget by taking into account the pandemic situation 7 .…”

“…https://www.imf.org/ en/Publications/WEO/Issues/2020/06/24/ WEOUpdateJune2020. 6 The ECB's response to the COVID-19 pandemic. Available at:…”