Fiscal Policy Matters

The paper sets out a DSGE model designed and calibrated to match key stylized facts about the Slovak economy. The model includes a detailed fiscal policy block that allows a thorough analysis of fiscal policy measures. To evaluate the performance of the model, the response of the economy to a technology shock and to a foreign demand shock is considered under alternative fiscal adjustment scenarios. We find that a well-designed programme involving increases in transfers as well as taxes can stabilize the economy in the short run and improve longer-term growth prospects following a shock with adverse fiscal implications. We study the consequences of fiscal policy shocks in and away from the steady state of the model. The exercise yields implied fiscal multipliers that are large in spite of Slovakia being a small open economy. Cutting infrastructure spending or raising taxes on consumption and employment are particularly bad for the real economy in a recession.
 
Keywords: dynamic stochastic general equilibrium model, simulations, fiscal rules, fiscal multipliers, fiscal consolidation

JEL classification: E32, C61, C63, D58, E62, H63, H5
 
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