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FiMod - a DSGE model for fiscal policy simulations

Author

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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.

Suggested Citation

  • Nikolai Stähler & Carlos Thomas, 2011. "FiMod - a DSGE model for fiscal policy simulations," Working Papers 1110, Banco de España;Working Papers Homepage.
  • 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;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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