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Adaptive Importance Sampling Estimation of an Open Economy Model with Fiscal Policy

Author

Listed:
  • Stefano Grassi

    (University of Rome Tor Vergata, Italy)

  • Marco Lorusso

    (University of Perugia, Italy; Newcastle University Business School, UK)

  • Francesco Ravazzolo

    (BI Norwegian Business School, Norway; Free University of Bozen-Bolzano, Italy; RCEA)

Abstract

We propose and estimate an open economy general equilibrium model that includes international trade between Canada and the US. For both countries, we consider a rich fiscal policy sector with two different types of public expenditure: productive and unproductive government spending. We estimate our model using a new adaptive methodology based on the Mixture of Student's t by Importance Sampling weighted Expectation-Maximization (MitISEM). Our findings regarding the Canadian economy indicate that, irrespective of the type of government expenditure, an increase in domestic public spending leads to an improvement of the domestic trade balance. Notably, we find that the domestic real exchange rate appreciates in response to a positive shock in the domestic unproductive government expenditure, whereas it depreciates after an increase in the domestic productive government spending. Our analysis indicates that a decrease in trade openness, for example resulting from a possible trade war, has important consequences for the propagation of productive and productive government spending shocks on the economy.

Suggested Citation

  • Stefano Grassi & Marco Lorusso & Francesco Ravazzolo, 2025. "Adaptive Importance Sampling Estimation of an Open Economy Model with Fiscal Policy," BEMPS - Bozen Economics & Management Paper Series BEMPS111, Faculty of Economics and Management at the Free University of Bozen.
  • Handle: RePEc:bzn:wpaper:bemps111
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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