Macroeconomic Effects of Fiscal Policy – Summary - Part 1

Monetary review, 3rd Quarter 2012

Authors Pedersen, Jesper; Ravn, Søren Hove
Subject Danish Economy
Type Monetary Review  
Year 2012
Published 23 October 2012
Fiscal policy plays a key role in economic stabilisation policy. This article provides a non-technical summary of a number of analyses of the effects of fiscal policy presented in Part 2 of this Monetary Review. Overall, the empirical findings show that fiscal policy in Denmark may have a significant impact on real gross domestic product, GDP, but that the effect is relatively short-lived. Thus the effect on GDP of fiscal expansion gradually dies out as the stimulus itself is removed. The article also presents an analysis of the effects of fiscal policy in a Dynamic Stochastic General Equilibrium model, DSGE model, which, in some respects, is based on very different model assumptions from those applied in a macroeconometric model such as MONA. This analysis shows that although the underlying mechanisms of the results differ in some respects, MONA and a DSGE model for Denmark produce relatively similar estimates of the effects on GDP of a temporary debt-financed fiscal expansion aimed at stabilising the business cycle.