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Adding a fiscal rule into a DSGE model: How much does it change the forecasts?

Author

Listed:
  • Mikhail Andreyev

    (Bank of Russia, Russian Federation)

  • Mikhail Andreyev

    (Bank of Russia, Russian Federation)

  • Mikhail Andreyev

    (Bank of Russia, Russian Federation)

Abstract

This article analyses an expansion of the dynamic stochastic general equilibrium model presented in Kreptsev, Seleznev (2017) and used by the Bank of Russia to forecast macroeconomic variables. The model was supplemented with an extended description of the fiscal sector, which formalises the fiscal rule in effect in Russia and which is similar to the one used in Medina, Soto (2007). The model was estimated on the basis of Russian data. Based on impulse response functions, we analyse the stabilising effect of the fiscal rule on macroeconomic variables. It was found that the fiscal rule leads to a decrease in output volatility, a slight decrease in exchange rate volatility and a stronger disinflationary effect in response to a positive oil price shock. The forecast errors were used to analyse whether it is possible to apply the formalisation of the fiscal rule in order to improve the forecast of macroeconomic variables within the DSGE model. We found that the fiscal rule does not improve the quality of the forecasts.

Suggested Citation

  • Mikhail Andreyev & Mikhail Andreyev & Mikhail Andreyev, 2020. "Adding a fiscal rule into a DSGE model: How much does it change the forecasts?," Bank of Russia Working Paper Series wps64, Bank of Russia.
    • Handle: RePEc:bkr:wpaper:wps64
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    References listed on IDEAS

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    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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