This paper presents a macroeconomic model with some microfoundations for a small open economy. The main purpose is the simulation of external environment and fiscal policy shocks. The model includes sufficiently disaggregated public sector and household disposable income accounts and it considers a fiscal policy rule that ensures the fulfilment of some budgetary requirements. Thus, the impact in main macroeconomic aggregates of alternative external environment shocks can be evaluated under the assumption that the government automatically adjusts the income tax rate to fulfill these requirements. Furthermore, it is well known that the impact of fiscal policy shocks depends crucially on the economic agents’ ability to adjust their behaviour to fiscal policy changes, according to their assessment on future economic developments. Since, this model considers economic agents that form model-consistent expectations, then fiscal policy simulations can be performed properly. In this study, the model is calibrated for the Portuguese economy and the fiscal rule budgetary requirements (a target fiscal balance of 3% of GDP and a debt-to-GDP ratio target of 60%) correspond to the Stability and Growth Pact excessive deficit thresholds. The simulations presented here can contribute to the current discussion of budgetary consolidation measures in Portugal.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
10465.
Find related papers by JEL classification: C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation
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