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The LU-EAGLE model with disaggregated public expenditure

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  • Pablo Garcia Sanchez
  • Alban Moura

Abstract

We augment the original LU-EAGLE model with disaggregated public expenditure, allowing for (i) a distinction between public consumption and investment expenditures, (ii) complementarity between public and private consumption, (iii) a productive role for public capital, and (iv) separate private and public employment. This extended model embeds a wide range of transmission channels from public expenditures and allows for a detailed analysis of the general-equilibrium effects of public demand in Luxembourg. Model simulations suggest that a rise in public employment induces the strongest GDP response in the short run, while a rise in public investment has the largest effects in the long run. The results also indicate that crowding-out effects through changes in net exports are essential in determining fiscal multipliers for small open economies such as Luxembourg.

Suggested Citation

  • Pablo Garcia Sanchez & Alban Moura, 2019. "The LU-EAGLE model with disaggregated public expenditure," BCL working papers 135, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp135
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    References listed on IDEAS

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    Cited by:

    1. Garcia, Pablo & Jacquinot, Pascal & Lenarčič, Črt & Lozej, Matija & Mavromatis, Kostas, 2023. "Global models for a global pandemic: The impact of COVID-19 on small euro area economies," Journal of Macroeconomics, Elsevier, vol. 77(C).
    2. Darracq Pariès, Matthieu & Notarpietro, Alessandro & Kilponen, Juha & Papadopoulou, Niki & Zimic, Srečko & Aldama, Pierre & Langenus, Geert & Alvarez, Luis Julian & Lemoine, Matthieu & Angelini, Elena, 2021. "Review of macroeconomic modelling in the Eurosystem: current practices and scope for improvement," Occasional Paper Series 267, European Central Bank.
    3. Alban Moura, 2020. "LED: An estimated DSGE model of the Luxembourg economy for policy analysis," BCL working papers 147, Central Bank of Luxembourg.

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    More about this item

    Keywords

    DSGE models; open economy models; fiscal policy; Luxembourg;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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