2026-08-23 Sunday

S&P Global Ratings raised Kazakhstan's sovereign rating to 'BBB' with a stable outlook, citing economic resilience and ample foreign exchange reserves. Inflation is set to fall to 10.2% by July 2026, while real GDP growth is forecast at 5.1% in 2026. The stable outlook also reflects expectations of further reduction in the non-oil budget deficit, supporting fiscal credibility and potentially lowering sovereign borrowing costs.

The inflationary impact of higher productivity is a priori ambiguous and depends on whether the shock is a one-off level increase or a persistent growth increase, the relative timing of supply and demand responses, the sectoral incidence (tradable vs non-tradable), and the monetary policy response. A temporary productivity shock is disinflationary, while a gradual permanent increase can be inflationary if demand rises ahead of supply, raising the natural rate of interest and requiring policy tightening.

Using a small open economy New Keynesian model with two production sectors, the paper calibrates key parameters: a household discount factor of 0.9877 ratio (implying a steady-state annual nominal rate of 5 pct annual), an import share of 0.60 ratio, and a non-tradables share of 0.7 ratio. The Taylor rule responds to inflation with a coefficient of 1.5 ratio and to output with 0 ratio. Price stickiness is captured by a Rotemberg cost of 19.8 ratio, implying an average price lifetime of 2 quarters. Productivity shocks have a persistence of 0.9 ratio, and home-tradable price pass-through persistence is 0.7 ratio.

The mechanism: a gradual permanent productivity increase raises the natural real interest rate, so if the central bank does not tighten policy, inflationary pressures build. Whether productivity is inflationary or disinflationary depends on whether demand precedes the supply expansion or supply keeps pace with demand. For a central bank like the Bank of England, this implies that productivity-driven demand must be met with higher policy rates, otherwise inflation can rise even as supply expands. Counterpoints: if productivity gains accrue to high-savers or if uncertainty raises precautionary savings, the natural rate could fall, making the shock disinflationary.

A Federal Reserve International Finance Discussion Paper by Martin Bodenstein and Junzhu Zhao, published August 2026, shows that Barro's random walk hypothesis for optimal labor taxes breaks down when policymakers have limited foresight. With cognitive discounting, the wealth effect of government debt produces stationary tax dynamics, except for specific parameter combinations; excessive discounting of the future leads to explosive dynamics. This challenges the fiscal policy implication that tax rates should follow a random walk, potentially altering how government debt affects tax smoothing. The paper is an IFDP, a series that often precedes Fed policy thinking; a follow-up would be whether it appears in Fed speeches or FOMC minutes, or if the authors present it at a major conference.

A Bank of England working paper quantifies that US capital gains tax cuts since the 1970s increased stock price-dividend volatility by about 35%. The effect is driven primarily by a stronger belief-to-price pass-through: isolating this channel via a counterfactual without realization frictions, lower taxes raise volatility by approximately 50%. Realization-based trading frictions and their interactions with the pass-through partially offset this, accounting for the residual −15%.

The model is a general equilibrium asset pricing framework with heterogeneous agents, realization-based taxation, and learning about dividends and prices. It is estimated by Simulated Method of Moments on US stock market data from 1975 to 2022, targeting moments from the excess volatility literature and capital gains realizations. The net effect of capital gains taxation on price volatility is theoretically ambiguous; which effect dominates is an empirical question. Under rational expectations with full knowledge, the pass-through effect is absent, so the results are sensitive to the nature of agents' uncertainty.

Policy experiments suggest that a tax on unrealized gains robustly reduces volatility: requiring an average rate of roughly 7%, the reform reduces valuation volatility by about 20%. In contrast, a financial transaction tax has mixed effects, consistent with mixed empirical findings. For investors, the mechanism is that lower capital gains taxes amplify belief-driven price swings, raising the risk premium demanded for holding equities, while a shift to accrual-based taxation could compress short-run valuation fluctuations and attenuate shock propagation.