NAC Analytica conducts advanced research in applied macro- and microeconomics in collaboration with world-class scientists. The economy of Kazakhstan is still largely unexplored due to the lack of research activities in these areas. The Economic Modeling Development Center at NAC Analytica was established to fill the gap.

Our focus is on modeling and applied research to develop recommendations for monetary policy, fiscal policy, the labor market, real sectors of the economy, and forecasting key macro variables.

The Center works in close cooperation with the Department of Economics of the School of Science and Humanities (Nazarbayev University). Students and faculty are encouraged to collaborate with us on collaborative data collection, economic modeling, and econometric analysis to create a strong research environment in applied macro and microeconomics within the university. The Center also aims to organize research seminars, symposiums and conferences aimed at disseminating research results and creating an international academic network in Kazakhstan.

NAC Analytica conducts advanced research in applied macro- and microeconomics in collaboration with world-class scientists. The economy of Kazakhstan is still largely unexplored due to the lack of research activities in these areas. The Economic Modeling Development Center at NAC Analytica was established to fill the gap.

Our focus is on modeling and applied research to develop recommendations for monetary policy, fiscal policy, the labor market, real sectors of the economy, and forecasting key macro variables.

The Center works in close cooperation with the Department of Economics of the School of Science and Humanities (Nazarbayev University). Students and faculty are encouraged to collaborate with us on collaborative data collection, economic modeling, and econometric analysis to create a strong research environment in applied macro and microeconomics within the university. The Center also aims to organize research seminars, symposiums and conferences aimed at disseminating research results and creating an international academic network in Kazakhstan.

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###### PUBLICATIONS AND WORKING PAPERS

- A Macroeconometric Model for Russia
- An Estimated Bayesian DSGE Model for Kazakhstan
- A Macroeconometric Model for Kazakhstan
- The Importance of Terms of Trade Shocks: Kazakhstan
- Microlevel Analyses of DSGE Model Parameters: Evidence from Kazakhstan
- A Two-Country Macroeconometric Model

**Abstract**

The paper outlines a structural macroeconometric model for the economy of Russia. The aim of the research is to analyze how the domestic economy functions, generate forecasts for important macroeconomic indicators and evaluate the responses of main endogenous variables to various shocks. The model is estimated based on quarterly data starting from 2001 to 2019. The majority of the equations are specified in error correction form due to the non-stationarity of variables. Stochastic simulation is used to solve the model for expost and ex-ante analysis. We compare forecasts of the model with forecasts generated by the VAR model. The results indicate that the present model outperforms the VAR model in terms of forecasting GDP growth, inflation rate and unemployment rate. We also evaluate the responses of main macroeconomic variables to VAT rate and world trade shocks via stochastic simulation. Finally, we generate ex-ante forecasts for the Russian economy under the baseline assumptions.

**Abstract**

A small scale open economy model is estimated for Kazakhstan via Bayesian methods. The model explicitly takes into account the dependence of the economy on commodity exports and also accounts for risk premium shocks in the foreign exchange market. The main contribution of the research is that it is the first DSGE model in literature estimated via Bayesian methods for Kazakhstan. The results of the model are used to determine the historical contribution of structural shocks to endogenous variables, forecast error variance decomposition of observed macroeconomic variables and impulse responses of important endogenous variables to various shocks. It has been found that the output gap turned significantly negative during the Great Recession and the negative oil price shock. The effect of contractionary monetary policy is found to be negative on output gap, but it negligibly affects the inflation rate in the economy. Risk premium shocks are found to account for almost 60% of forecast error variance decomposition of nominal exchange rate of tenge over all horizons.

**Abstract**

The paper builds a structural macroeconometric model for Kazakhstan to generate short-term and medium-term forecasts for main macroeconomic variables and conduct scenario analyses based on dynamic simulation of the model. Due to the poor quality of quarterly data on GDP and its expenditure components, they have been adjusted using volume indexes. The model consists of aggregate supply, aggregate demand, labor market, asset market, the central bank policy and government side equations. Most equations are estimated via econometric techniques and identities are explicitly introduced in line with economic theory. We combine all the regression equations into a single model and solve for the baseline scenario from 2003 to 2017. The simulation results show that the structural macroeconometric model approximates Kazakhstani economy reasonably well. Ex-ante forecasts under oil prices remaining around 50 and 60 US dollars per barrel are generated and compared with the baseline forecast of the National Bank of the Republic of Kazakhstan.

**Abstract**

The conventional wisdom assumes that terms of trade shocks are the main drivers of business cycle dynamics in emerging exporting economies. This paper studies the effect of terms of trade shocks on key macroeconomic variables for the Kazakhstani economy. Empirical SVAR model estimates suggest that the terms of trade shocks account for 12 % of output variation for the economy. Further, three sectoral DSGE model with estimated structural parameters predict the modest importance of the terms of trade shocks for small open economy.

**Abstract**

Dynamic stochastic general equilibrium (DSGE) models are widely used by central banks, government agencies and financial organizations to conduct simulation and forecast relevant macroeconomic indicators in the economy. The most important inputs into all DSGE models are structural parameters which are either calibrated from other sources or estimated via Bayesian methods. Using non-public microlevel data, we estimate ten structural parameters for Kazakhstan: the elasticity of substitution between exports and imports, constant relative risk aversion, intertemporal elasticity of substitution in consumption, Frisch elasticity of labor supply, the depreciation rate of physical capital, capital and labor shares, and the elasticity of substitution between tradable and nontradable goods. Various econometric techniques such as fixed-effects, generalized method of moments (GMM), Arellano-Bond, and non-linear iterative maximum likelihood estimation are used to obtain consistent estimates of the models' coefficients. The structural parameters can be used in calibrated DSGE models as fixed parameters or as prior information in Bayesian estimation of the models.

**Abstract**

This paper presents a two-country macroeconometric model for the economies of Kazakhstan and Russia. The model can be used for interpreting the structural relationship between the two economies, determining the degree of trade integration and implementing scenario analyses with various shocks. Single-country models are linked through bilateral trade and exchange rate equations. The baseline simulation of the two-country model demonstrates a good accuracy in tracking the actual dynamics of macroeconomic indicators in both countries. Scenario analyses are conducted with a risk premium shock in the bilateral exchange rate and a monetary policy shock in Russia to analyze the transmission mechanism of the shocks, and clarify on the kind of interdependency of the economies. The model shows a larger influence of the risk premium shock on economic activity in Kazakhstan than in Russia. A two percentage point decline in the key rate does not impose significant inflationary pressure while imports and the real exchange rate are the most affected variables in both countries.

###### PUBLICATIONS AND WORKING PAPERS

- A Macroeconometric Model for Russia
- An Estimated Bayesian DSGE Model for Kazakhstan
- A Macroeconometric Model for Kazakhstan
- The Importance of Terms of Trade Shocks: Kazakhstan
- Microlevel Analysis of DSGE Model Parameters: Evidence from Kazakhstan
- A Two-Country Macroeconometric Model

**Abstract**

The paper outlines a structural macroeconometric model for the economy of Russia. The aim of the research is to analyze how the domestic economy functions, generate forecasts for important macroeconomic indicators and evaluate the responses of main endogenous variables to various shocks. The model is estimated based on quarterly data starting from 2001 to 2019. The majority of the equations are specified in error correction form due to the non-stationarity of variables. Stochastic simulation is used to solve the model for expost and ex-ante analysis. We compare forecasts of the model with forecasts generated by the VAR model. The results indicate that the present model outperforms the VAR model in terms of forecasting GDP growth, inflation rate and unemployment rate. We also evaluate the responses of main macroeconomic variables to VAT rate and world trade shocks via stochastic simulation. Finally, we generate ex-ante forecasts for the Russian economy under the baseline assumptions.

**Abstract**

A small scale open economy model is estimated for Kazakhstan via Bayesian methods. The model explicitly takes into account the dependence of the economy on commodity exports and also accounts for risk premium shocks in the foreign exchange market. The main contribution of the research is that it is the first DSGE model in literature estimated via Bayesian methods for Kazakhstan. The results of the model are used to determine the historical contribution of structural shocks to endogenous variables, forecast error variance decomposition of observed macroeconomic variables and impulse responses of important endogenous variables to various shocks. It has been found that the output gap turned significantly negative during the Great Recession and the negative oil price shock. The effect of contractionary monetary policy is found to be negative on output gap, but it negligibly affects the inflation rate in the economy. Risk premium shocks are found to account for almost 60% of forecast error variance decomposition of nominal exchange rate of tenge over all horizons.

**Abstract**

The paper builds a structural macroeconometric model for Kazakhstan to generate short-term and medium-term forecasts for main macroeconomic variables and conduct scenario analyses based on dynamic simulation of the model. Due to the poor quality of quarterly data on GDP and its expenditure components, they have been adjusted using volume indexes. The model consists of aggregate supply, aggregate demand, labor market, asset market, the central bank policy and government side equations. Most equations are estimated via econometric techniques and identities are explicitly introduced in line with economic theory. We combine all the regression equations into a single model and solve for the baseline scenario from 2003 to 2017. The simulation results show that the structural macroeconometric model approximates Kazakhstani economy reasonably well. Ex-ante forecasts under oil prices remaining around 50 and 60 US dollars per barrel are generated and compared with the baseline forecast of the National Bank of the Republic of Kazakhstan.

**Abstract**

The conventional wisdom assumes that terms of trade shocks are the main drivers of business cycle dynamics in emerging exporting economies. This paper studies the effect of terms of trade shocks on key macroeconomic variables for the Kazakhstani economy. Empirical SVAR model estimates suggest that the terms of trade shocks account for 12 % of output variation for the economy. Further, three sectoral DSGE model with estimated structural parameters predict the modest importance of the terms of trade shocks for small open economy.

**Abstract**

Dynamic stochastic general equilibrium (DSGE) models are widely used by central banks, government agencies and financial organizations to conduct simulation and forecast relevant macroeconomic indicators in the economy. The most important inputs into all DSGE models are structural parameters which are either calibrated from other sources or estimated via Bayesian methods. Using non-public microlevel data, we estimate ten structural parameters for Kazakhstan: the elasticity of substitution between exports and imports, constant relative risk aversion, intertemporal elasticity of substitution in consumption, Frisch elasticity of labor supply, the depreciation rate of physical capital, capital and labor shares, and the elasticity of substitution between tradable and nontradable goods. Various econometric techniques such as fixed-effects, generalized method of moments (GMM), Arellano-Bond, and non-linear iterative maximum likelihood estimation are used to obtain consistent estimates of the models' coefficients. The structural parameters can be used in calibrated DSGE models as fixed parameters or as prior information in Bayesian estimation of the models.

**Abstract**

This paper presents a two-country macroeconometric model for the economies of Kazakhstan and Russia. The model can be used for interpreting the structural relationship between the two economies, determining the degree of trade integration and implementing scenario analyses with various shocks. Single-country models are linked through bilateral trade and exchange rate equations. The baseline simulation of the two-country model demonstrates a good accuracy in tracking the actual dynamics of macroeconomic indicators in both countries. Scenario analyses are conducted with a risk premium shock in the bilateral exchange rate and a monetary policy shock in Russia to analyze the transmission mechanism of the shocks, and clarify on the kind of interdependency of the economies. The model shows a larger influence of the risk premium shock on economic activity in Kazakhstan than in Russia. A two percentage point decline in the key rate does not impose significant inflationary pressure while imports and the real exchange rate are the most affected variables in both countries.

###### ONGOING RESEARCH

- Fiscal Rules in a DSGE Model for an Oil-Exporting Economy: The Case of Kazakhstan
- CBDC and Financial Stability in a DSGE Model for Kazakhstan
- Sectoral Total Factor Productivity and Its Determinants: Firm-Level Evidence from Kazakhstan
- Predicting the demand for CBDC using survey data in Kazakhstan

In this paper, we analyze fiscal rules in an oil-exporting economy using the DSGE model for Kazakhstan. The model is estimated using Bayesian methods, and we analyze the four fiscal rules of the government of Kazakhstan in the face of a negative oil price shock. We find that fiscal policy in Kazakhstan has been pro-cyclical and some fiscal rules are redundant in the model. In addition, a fiscal rule designed to limit the use of a country's sovereign wealth fund assets, contrary to conventional wisdom, results in a reduction in assets when there is a negative oil price shock. We also find that two rules that cap interest payments on government debt and cap non-oil fiscal deficits lead to a more stable response of key endogenous variables to negative oil price shocks and do not result in a significant reduction in sovereign wealth fund assets.

To study the role of CBDC in financial stability in Kazakhstan, we build a DSGE model with nominal and real rigidities, which includes the banking sector characterized by monopolistic competition. The model is based on the work of Gerali et al. (2010), which examines the role of financial frictions and banking intermediation in business cycles. We complement the model with liquidity preferences in the household utility function, which consists of cash and CBDC. We estimate the model via Bayesian methods using macroeconomic and financial data for Kazakhstan. The economy is populated by a continuum of households (savers and borrowers) and entrepreneurs. Households consume, supply labor and accumulate housing capital. The utility function of entrepreneurs is determined only by consumption, and they also produce homogeneous goods using the services of labor and physical capital. Banks in the model have market power in their intermediary activities. This allows banks to adjust interest rates on loans and deposits in response to external shocks. In addition, banks must adhere to the identity of the balance sheet and follow the capital adequacy ratio. In line with the literature on the CBDC and financial stability, we focus on the impact of the CBDC on bank intermediation in Kazakhstan (lending and borrowing). We analyze the impact of CDBC on financial stability under four different scenarios. We choose the following variables to measure financial stability: banks' interest rate spread (difference between lending and deposit rates), banks' equity-to-assets ratio, return on assets, and banks' return on equity.

The paper analyzes the level of productivity and competition in the domestic market of Kazakhstan. We show that the total factor productivity in many industries fell significantly from 2009 to 2017. At the same time, from 3 to 10 of the largest firms in the industry occupy a significant market share in most industries, demonstrating the elements of oligopolistic competition in the market where prices are set by a few large firms. An econometric analysis demonstrates that increased investments, profits, wages, subsidies, and the presence of employees aged under 30 or with higher education have a significant positive effect on the level of enterprise productivity. Firms that are subsidized and carry out R&D experience a significant increase in productivity: with a 10% increase in subsidies productivity increases by 2.2% on average. Subsidies are received annually by almost the same firms, which contributes to an increase in the market power of these firms. Statistics show that 5 companies in the market receive up to about 80% of subsidies in manufacturing and agriculture. Such an uneven distribution of subsidies among firms contributes to the development of monopoly in the market.

One of the aims of the current microeconometric study is to predict the potential demand for CBDC in Kazakhstan compared to its close alternatives using a framework provided by Li (2021) based on a structural demand model. Assessing the potential demand for CBDC is important for understanding the impact of CBDC on banking products and the potential of CBDC usage in the country. CBDC, cash, and deposits are considered product bundles of different attributes. Utility gains of households from holding each product depend on product attributes such as convenience, cost of use, security, acceptance rate, anonymity, budgeting, household characteristics, and the unobserved households’ idiosyncratic preferences.

###### ONGOING RESEARCH

- A Macroeconometric Model for EAEU
- The Role of Banking and Credit in Business Cycle Fluctuations in Kazakhstan
- Predicting Recessions in Kazakhstan Using Markov-Switching Model
- A Multi-Pillar Pension System of Kazakhstan in the OLG Model
- Spatial Concentration and Firm-Level Productivity
- Measuring Non-Tariff Barriers Between the Countries of the Eurasian Economic Union

A structural macroeconometric model is built for the group of countries of EAEU and deterministic simulation of the model is conducted. Although the macroeconometric models are considered as outdated in modern macroeconomic theory, it is still used by most research institutes due to their flexibility and data-oriented nature in contrast to general equilibrium models that are popular in academic literature. The model consists of a system of equations estimated for each member country in the union and the economies are linked through bilateral trade equations and bilateral exchange rate equations. As a result, we obtain a large structural model for EAEU. The present model allows one to generate forecasts for EAEU economies, the analyses of the degree of integration of EAEU member countries since its formation, and the transmission of shocks from one member-state to another. Particularly, we analyze how monetary tightening and fiscal consolidation in each member country affect other member countries, the degree of trade integration between the countries after the establishment of the EAEU and comparison of the dynamics of macroeconomic variables under the baseline model and real world observations. In addition, other scenarios concerning positive/negative oil price shocks and sanctions on Russia are explored as part of the research.

In this paper we introduce a banking sector in a small open economy DSGE model in order to understand the role of banking intermediation in the transmission of monetary policy shocks and to analyze how shocks that originate in credit matrkets are transmitted to the real economy. In doing so, we follow Geralli et al (2008) and assume that the banking sector is characterized as having features of a monopolistic competition. Geralli et al (2008) support this assumption by referring to the empirical evidence which suggests that bank rates are heteregenous in the adjustment speed to changing conditions in money market interest rates. Overall, the model features credit frictions and borrowing contraints, and a set of real and nominal rigidities. The imperfectly competitive banking sector in the model collects deposits and/or borrows at the interbank market and lends to the private sector. These banks apply a time-varying and slowly adjusting mark-up over the policy rate in setting different interest rates to households and firms.

The model is used to analyze two issues. First, we want to understand the role of banking sector in the transmission mechanism of monetary policy in Kazakhstan. Second, we would like to analyze the effect of financial shocks, related to the bank rates and borrowing restrictions, on the real economy.

The main aim of the model is to be able to predict an economic recession in the next period. For that purpose, an econometric model, based on the Markov-switching, will be employed. The important difference with other popular forecasting models is that the assumption of linearity of observed series is abandoned. Instead, this model uses the fact that most of the observed time series follow a non-linear process. There is an abundant evidence of non-linearity of key macroeconomic variables.

Non-linearities in the present model arise if the observed series process is subject to discrete shifts in regime. Here, regime means states of the economy, either expansion or recession. The main approach is to use Markov regime switching regression, presented in Hamilton (1989), to characterize changes in parameters of autoregressive process. To put differently, the model involves multiple structures that characterize time series behavior in different regimes or states. Then, switching mechanism, which follows a first-order Markov chain, is used to capture complex dynamic patterns. Further, statistical estimates of the states of the economy (expansion or recession) will be uncovered using a non-linear filter (smoother). This filter is similar to the Kalman filter but, unlike the Kalman filter, it allows to provide non-linear inference about the unobserved state vector. Markov regime switching model is superior to logit linear models in its predictive power. In addition, this model allows the policymaker to infer future probabilities of recession in real time.

The pension system of Kazakhstan has undergone through various legislative changes since its first reform in 1998. The current pension landscape of the country embodies a multi-pillar system with three levels of pension components. We use the Overlapping Generations Model (OLG) to examine the existing pension system of Kazakhstan by highlighting the features of each pillar in the pension block. OLG models are one the most advanced and widely used tools which can be employed to investigate the impact of fiscal policy changes and pension system reforms on the economy. In our model, the economy is populated with active and retired generations. We introduce heterogeneity with professional categories (high, medium and low qualified specialists) differentiated by gender. The structural parameters of the economy are estimated using micro-level data from 2009 to 2018. A number of scenario analyses can be conducted within the framework of the model to examine the effects of different policy options and pension system reforms on macroeconomic dynamics. Specifically, we are interested in the consequences of replacement ratio shocks, increasing the retirement age for women and raising the level of compulsory pension contributions made by employers. These topics are particularly relevant in the current economic context of Kazakhstan. Hence, the model can be an attractive tool for government agencies to use in making policy related decisions.

The research is aimed to empirically analyze the impact of spatial and territorial agglomeration on the productivity of firms using panel data. The model allows us to answer the following questions:

1) What will be the economic benefits of clustering the economy? In particular, how much does firm productivity increase when other firms from the same or another sector decide to locate nearby?

2) How much do firms benefit from deciding where to locate?

3) Are there good reasons for government intervention in favor of industrial clusters?

One of the main changes in the trade policy of Kazakhstan, due to its admission to the CU, was the increase of tariff rates for non-ECU countries. Mkrtchyan and Gnutzmann (2012) and Jandosov and Sabyrova (2011) concluded that there was a significant increase in Kazakhstan’s tariff protection level after its accession to the CU with the simple average tariff rate increasing from 6.45% to 12.02%. However, the accession of Russia and Kazakhstan to the WTO will decrease the tariff rates of the ECU and hence the trade diversion. Shepotylo and Tarr (2012) calculated that after Russia implemented all commitments to the WTO, average weighted tariff rates of ECU would decrease from 13 in 2011 to 5.8% in 2020. There was no trade creation based on the removal of the tariffs within the CU of Russia, Kazakhstan, Belarus, Armenia and Kyrgyzstan as, since 1994, these countries were in an FTA; hence, no extra tariff preference was given since the creation of the CU. Countries might benefit from the decrease of non-tariff barriers (NTB), such as the abolition of the customs controls, adoption of the single system of phytosanitary norms, single system of customs regulation and procedures. Research undertaken by the EBRD (2012) and ADB (2012) have shown that NTB have decreased since the establishment of the ECU. All of these papers used surveys to determine change in non-tariff barriers between EEU countries. However, no one retrieve the tariff equivalent of non-tariff barriers for EEU countries before and after creation of the CU using econometric techniques. In the first paper we will study non-tariff barriers between Kazakhstan and other EEU members on the industry level (2 or 4 HS digit numbers). Using gravity model we will retrieve the yearly tariff equivalent of non-tariff barriers for all industries from 2000 to 2019. If data will show that non-tariff barriers are decreasing for a particular industry, then there might a possibility for trade creating effect in this sector. We will quantify this effect in the second paper.