Fiscal Policy in Macroeconomic Models - Part 2

Monetary review, 3rd Quarter 2012

Authors Pedersen, Jesper
Subject Danish Economy
Type Monetary Review  
Year 2012
Published 23 October 2012
This article sheds light on the effects of fiscal policy in Denmark in a DSGE model compared with the effects in a macroeconometric model such as MONA. The analysis shows that MONA and the applied DSGE model arrive at relatively similar estimates of the effects on GDP of a temporary debt-financed fiscal expansion aimed at stabilising the business cycle. However, in some areas there are pronounced differences as regards the underlying structures and mechanisms producing the results. A debt-financed increase in government purchases of goods and services equivalent to 1 per cent of GDP, which is reduced by around 20 per cent per quarter, causes real GDP to rise by approximately 0.4 per cent in MONA and around 0.6 in the DSGE model in the first quarter after the increase in government purchases of goods and services. These differences should particularly be viewed in conjunction with various assumptions regarding formation of expectations and forward-looking behaviour in the modelling of firms and households.