Fiscal policy feasibility in Tunisia: a neo-Keynesian DSGE model approach

The main objective of this article is to apply a neo-Keynesian DSGE model with nominal rigidity and monopolistic competition to analyse the impact of public expenditure's variation in Tunisia on the main macroeconomic aggregates (business cycle, private consumption, wages, interest rate and inflation rate). The simulation results show that the implementation of fiscal policy via the increase in public spending in Tunisia is pro-cyclical. Indeed, the increase in public spending generates two first effects. GDP increases due to the rise in labour supply and the rise in aggregate demand due to an incomplete crowding out of private consumption. Thus, after the rise in aggregate demand, the Central Bank increases the nominal interest rate, which evolves in concert with the inflation rate to counter inflationary pressures. Consequently, households reduce their consumption expenditure as the real interest rate rises. At this level, some companies react to the change in the interest rate by reducing their expenses, their employment requirements and their capital utilisation rates.