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FiMod - a DSGE model for fiscal policy simulations

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  • Nikolai Stähler

    ()
    (Deutsche Bundesbank)

  • Carlos Thomas

    ()
    (Banco de España)

Abstract

This paper develops a medium-scale dynamic, stochastic, general equilibrium (DSGE) model for fiscal policy simulations. Relative to existing models of this type, our model incorporates two important features. First, we consider a two-country monetary union structure, which makes it well suited to simulate fiscal measures by relatively large countries in a currency area. Second, we provide a notable degree of disaggregation on the government expenditures side, by explicitly distinguishing between (productivity-enhancing) public investment, public purchases and the public sector wage bill. In addition, we consider a labor market characterized by search and matching frictions, which allows to analyze the response of equilibrium unemployment to fiscal measures. In order to illustrate some of its applications, and motivated by recent policy debate in the Euro Area, we calibrate the model to Spain and the rest of the area and simulate a number of fiscal consolidation scenarios. We find that, in terms of output and employment losses, fiscal consolidation is the least damaging when achieved by reducing the public sector wage bill, whereas it is most damaging when carried out by cutting public investment.

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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1110.

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Length: 53 pages
Date of creation: May 2011
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Handle: RePEc:bde:wpaper:1110

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Keywords: DSGE model; fiscal policy; two-country monetary union; disaggregation of fiscal expenditures; labor market frictions;

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Cited by:
  1. Alfredo Marvão Pereira & Rui M. Pereira, 2011. "On the Economic and Budgetary Impact of Fiscal Devaluation in Portugal," Working Papers 116, Department of Economics, College of William and Mary.
  2. Costa Junior, Celso Jose & Sampaio, Armando Vaz & Gonçalves, Flávio de Oliveria, 2012. "Income Transfer as Model of Economic Growth," MPRA Paper 45494, University Library of Munich, Germany.
  3. Dieter Hundt & Frank-Jürgen Weise & Hagen Lesch & Wolfgang Lechthaler & Christian Merkl, 2012. "Eurokrise, Energiewende, Konjunkturabkühlung: Ende des deutschen Jobwunders?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 65(01), pages 03-13, 01.
  4. Serbanoiu, Georgian Valentin, 2012. "Transmission of fiscal policy shocks into Romania's economy," MPRA Paper 40947, University Library of Munich, Germany.
  5. Javier Andrés & J.E. Boscá & Javier Ferri, 2014. "Instruments, rules and household debt: the effects of fiscal policy," Working Papers 1401, International Economics Institute, University of Valencia.
  6. Javier Andrés & José Emilio Boscá & Javier Ferri, 2011. "Household Leverage and Fiscal Multipliers," Working Papers 1103, International Economics Institute, University of Valencia.
  7. Costa Junior, Celso José & Sampaio, Armando Vaz, 2014. "Tax Reduction Policies of the Productive Sector and Its Impacts on Brazilian Economy," Dynare Working Papers 36, CEPREMAP.
  8. Tim Schwarzmüller & Nikolai Stähler, 2013. "Reforming the labor market and improving competitiveness: an analysis for Spain using FiMod," SERIEs, Spanish Economic Association, vol. 4(4), pages 437-471, November.
  9. Gustav A. Horn & Alexander Herzog-Stein & Ansgar Rannenberg & Katja Rietzler & Silke Tober & Rudolf Zwiener, 2014. "Wirtschaftspolitische Herausforderungen 2014," IMK Report 90-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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