Macroeconomic Effects of Reducing the Statutory Social Security Contribution Rate in Mongolia: Evidence from a Structural VECM

<jats:p>This paper investigates the macroeconomic effects of reducing the statutory social security contribution (SSC) rate in Mongolia using a structurally identified time-series framework. Motivated by recent fiscal pressures and proposed labour market reforms, the study uses quarterly data from 2000Q1 to 2024Q4 and applies a recursive Cholesky identification strategy to assess the short-run macroeconomic effects of an SSC rate cut. Given the presence of unit roots in several variables and evidence of cointegration, a Structural Vector Error Correction Model (SVECM) with two cointegrating vectors is adopted as the preferred specification. This approach corrects for non-stationarity while preserving the recursive identification structure used to identify the SSC policy shock. The policy simulation considers a one-percentage-point reduction in the statutory SSC rate, from 22 percent to 21 percent. The point estimates suggest that the SSC rate cut is associated with a positive cumulative real GDP response of approximately MNT 39.6 billion after eight quarters and MNT 60.0 billion after twelve quarters. The implied fiscal multiplier rises from 0.07 at the four-quarter horizon to 0.28 at twelve quarters, with the cumulative output response becoming statistically significant from the twelfth quarter onward, broadly within the range reported in the international literature on small open and developing economies. The effect on inflation is small and mildly disinflationary, while the lending rate response is modest and the real effective exchange rate shows a slight depreciation supportive of export competitiveness. These findings suggest that SSC rate reductions may provide a moderate short-run stimulus to economic activity, although the estimated magnitudes are subject to uncertainty and should be interpreted as conditional on the chosen SVECM specification and recursive identification assumptions. Overall, the results support the view that carefully designed SSC rate cuts can serve as a countercyclical fiscal policy instrument, provided that fiscal sustainability and social insurance fund balances are also taken into account.</jats:p>