Assessing the impact of fiscal measures on the Czech economy

• Published in: Economic modelling 2015-01, Vol.44, p.350-357
• Main Authors: Ambriško, Róbert, Babecký, Jan, Ryšánek, Jakub, Valenta, Vilém
• Format: Article
• Language: English
• Subjects: Bayesian analysis; Bayesian estimation; Consumption; Czech Republic; DSGE; Eastern Europe; Economic theory; Employers; Expenditure; Fiscal multipliers; Fiscal policy; Fiscal rule; GDP; Gross Domestic Product; Open economy; Social security; Studies; Unemployment
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2014.07.021

We build a DSGE model to investigate the transmission of fiscal policy to the real economy in the Czech Republic. Departing from the elements of the Czech National Bank's current g3 forecasting model (Andrle, Hlédik, Kameník, and Vlček, 2009), we introduce a comprehensive fiscal sector incorporating a number of modeling features that are often neglected in the mainstream DSGE literature, e.g. allowing government consumption and government capital to be productive. Furthermore, we extend our fiscal model to include unemployment in a way proposed by Galí, López-Salido, and Vallés (2007). Crucial fiscal parameters, related mainly to the specified fiscal rule, are estimated using Bayesian techniques. The model is then used to calculate a set of fiscal multipliers for individual revenue and expenditure items of the government budget. We find that the largest real GDP fiscal multipliers in the first year are associated with government consumption (0.6), social security contributions paid by employers (0.6), and government investment (0.5). •We build an open economy DSGE model to investigate the transmission of fiscal policy.•Labor market extension is introduced to capture the effect of unemployment benefits.•Crucial fiscal parameters are estimated using Bayesian techniques.•We calculate fiscal multipliers for individual revenue and expenditure categories.•The model is used to simulate the effects of the selected fiscal measures.