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The Effects of COVID-19 and their Mitigation through Fiscal Policy: Results from a DSGE Model with Financial Frictions

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  • Stefania Stancu

Abstract

This study investigates the effectiveness of fiscal policy in macroeconomic stabilization during the COVID-19 health crisis through a Dynamic Stochastic General Equilibrium (DSGE) model, incorporating financial frictions and using Romanian empirical data from 2007-2020. We analyse the impact of a consumption and labour demand shock similar to the ones occurring during the COVID-19 health crisis and explore how discretionary fiscal measures can modulate their effects. The findings suggest that increased government spending during the economic downturns of COVID-19 appears to mitigate some of the adverse effects, particularly on output and investment. While consumption does not seem to benefit significantly from fiscal stimulus, public spending helps to moderate declines in output and bolsters investment, especially in scenarios with a financial accelerator.

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  • Stefania Stancu, 2024. "The Effects of COVID-19 and their Mitigation through Fiscal Policy: Results from a DSGE Model with Financial Frictions," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 16(2), pages 295-308, December.
    • Handle: RePEc:rfb:journl:v:16:y:2024:i:2:p:295-308
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