The Impact of Consumption Taxes on the Macroeconomic Policy Mix: A DSGE Model with Financial Frictions

The paper captures the effects of a fiscal policy shock on macroeconomic environment in Romania, using a Dynamic Stochastic General Equilibrium (DSGE) model with financial accelerator, using country specific data for the period 2011-2023. The recent reliance on higher consumption taxes as a primary tool for reducing Romania’s budget deficit highlights the need to assess their macroeconomic consequences. A consumption tax demand shock, representing a 1 percent increase relative to the steady-state level, is expected to reduce economic activity by approximately 0.2 percent in the presence of financial frictions. The significant differences between scenarios with and without a financial accelerator highlight the importance of financial stability policies aimed at increasing the economy’s resilience to adverse shocks. Moreover, effective coordination among macroeconomic policies is essential in an environment characterized by overlapping and recurrent crises.