The Effects of Fiscal Policy in an Estimated DSGE Model – The Case of the German Stimulus Packages During the Great Recession
IWH Discussion Papers,
In this paper, we analyse the effects of the stimulus packages adopted by the German government during the Great Recession. We employ a standard medium-scale dynamic stochastic general equilibrium (DSGE) model extended by non-optimising households and a detailed fiscal sector. In particular, the dynamics of spending and revenue variables are modeled as feedback rules with respect to the cyclical component of output. Based on the estimated rules, fiscal shocks are identified. According to the results, fiscal policy, in particular public consumption, investment, transfers and changes in labour tax rates including social security contributions prevented a sharper and prolonged decline of German output at the beginning of the Great Recession, suggesting a timely response of fiscal policy. The overall effects, however, are small when compared to other domestic and international shocks that contributed to the economic downturn. Our overall findings are not sensitive to the allowance of fiscal foresight.
Monetary Policy in an Oil-dependent Economy in the Presence of Multiple Shocks
IWH Discussion Papers,
Russian monetary policy has been challenged by large and continuous private capital outflows and a sharp drop in oil prices during 2014, with both ongoings having put a significant depreciation pressure on the ruble and having led the central bank to eventually give up its exchange rate management strategy. Against this background, this paper estimates a small open economy model for Russia, featuring an oil price sector and extended by a specification of the foreign exchange market to correctly account for systematic central bank interventions. We find that shocks to the oil price and private capital flows substantially affect domestic variables such as inflation, output and the exchange rate. Simulations of the model for the estimated actual strategy and five alternative regimes suggest that the vulnerability of the Russian economy to external shocks can substantially be lowered by adopting some form of an inflation targeting strategy. Foreign exchange intervention-based policy strategies to target the nominal exchange rate or the ruble price of oil, on the other hand, prove inferior to the policy in place.