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Fiscal DSGE model for Latvia

Fiscal DSGE model for Latvia

Authors :
Ginters Bušs
Patrick Grüning
Source :
Baltic Journal of Economics, Vol 23, Iss 1, Pp 1-44 (2023)
Publication Year :
2023
Publisher :
Taylor & Francis Group, 2023.

Abstract

ABSTRACTWe develop a fiscal dynamic stochastic general equilibrium (DSGE) model for policy simulation and scenario analysis purposes tailored to Latvia, a small open economy in a monetary union. The fiscal sector elements comprise public investment, public consumption, government transfers that are asymmetrically directed to both optimizing and restricted (hand-to-mouth) households, cyclical unemployment benefits, foreign ownership of public debt, import content in public consumption and investment, and fiscal rules for each fiscal instrument. The model features a search-and-matching labour market friction with pro-cyclical labour costs, a financial accelerator mechanism, and import content in final goods. We estimate the model using Latvian data, study the new channels in the model, and provide a comprehensive analysis on the macroeconomic effects of the fiscal elements. Our results indicate that Latvian fiscal policy was pro-cyclical during the boom-bust period of 2004–2010 and that foreign ownership of public debt breaks Ricardian equivalence and raises fiscal multipliers.

Details

Language :
English
ISSN :
1406099X and 23344385
Volume :
23
Issue :
1
Database :
Directory of Open Access Journals
Journal :
Baltic Journal of Economics
Publication Type :
Academic Journal
Accession number :
edsdoj.19d2c0eff57349839df792d1c5e432c1
Document Type :
article
Full Text :
https://doi.org/10.1080/1406099X.2023.2173915