IDEAS home Printed from https://ideas.repec.org/p/cnb/wpaper/2016-09.html
   My bibliography  Save this paper

Effects of Fiscal Policy in the DSGE-VAR Framework: The Case of the Czech Republic

Author

Listed:
  • Jan Babecky
  • Michal Franta
  • Jakub Rysanek

Abstract

In this paper we explore the potential of the DSGE-VAR modelling approach for examining the effects of fiscal policy. The combination of the VAR and DSGE frameworks leads theoretically to more accurate estimates of impulse responses and consequently of fiscal multipliers. Moreover, the framework allows for discussion about the differences of the effects of fiscal shocks in DSGE and VAR models and to some extent discussion about misspecification in fiscal DSGE models. The DSGE-VAR model is estimated on Czech data covering the period from 1996 to 2011 at quarterly frequency. The government consumption multiplier attains a value close to 0.4 at the horizon of four years. The public investment multiplier is about 0.4 higher, which confirms findings in the literature. On the other hand, the DSGE model alone implies a similar government consumption multiplier but a much lower public investment multiplier, suggesting misspecification of the fiscal DSGE model.

Suggested Citation

  • Jan Babecky & Michal Franta & Jakub Rysanek, 2016. "Effects of Fiscal Policy in the DSGE-VAR Framework: The Case of the Czech Republic," Working Papers 2016/09, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2016/09
    as

    Download full text from publisher

    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/cnbwp_2016_09.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-652, June.
    2. Cole, Stephen J. & Milani, Fabio, 2019. "The Misspecification Of Expectations In New Keynesian Models: A Dsge-Var Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 23(3), pages 974-1007, April.
    3. Barbara Rossi & Sarah Zubairy, 2011. "What Is the Importance of Monetary and Fiscal Shocks in Explaining U.S. Macroeconomic Fluctuations?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(6), pages 1247-1270, September.
    4. Lees, Kirdan & Matheson, Troy & Smith, Christie, 2011. "Open economy forecasting with a DSGE-VAR: Head to head with the RBNZ published forecasts," International Journal of Forecasting, Elsevier, vol. 27(2), pages 512-528, April.
    5. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
    6. repec:ecb:ecbwps:20111429 is not listed on IDEAS
    7. Philip Liu & Konstantinos Theodoridis, 2012. "DSGE Model Restrictions for Structural VAR Identification," International Journal of Central Banking, International Journal of Central Banking, vol. 8(4), pages 61-95, December.
    8. John Geweke, 1999. "Using Simulation Methods for Bayesian Econometric Models," Computing in Economics and Finance 1999 832, Society for Computational Economics.
    9. Eric M. Leeper & Nora Traum & Todd B. Walker, 2017. "Clearing Up the Fiscal Multiplier Morass," American Economic Review, American Economic Association, vol. 107(8), pages 2409-2454, August.
    10. John Geweke, 1999. "Using simulation methods for bayesian econometric models: inference, development,and communication," Econometric Reviews, Taylor & Francis Journals, vol. 18(1), pages 1-73.
    11. Jesús Crespo Cuaresma & Markus Eller & Aaron Mehrotra, 2011. "The Economic Transmission of Fiscal Policy Shocks from Western to Eastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 44-68.
    12. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521839198, September.
    13. repec:zbw:bofitp:2011_012 is not listed on IDEAS
    14. Eric M. Leeper & Nora Traum & Todd B. Walker, 2015. "Clearing Up the Fiscal Multiplier Morass: Prior and Posterior Analysis," NBER Working Papers 21433, National Bureau of Economic Research, Inc.
    15. Michal Franta, 2012. "Macroeconomic Effects of Fiscal Policy in the Czech Republic: Evidence Based on Various Identification Approaches in a VAR Framework," Working Papers 2012/13, Czech National Bank.
    16. Vladimir Klyuev & Stephen Snudden, 2011. "Effects of Fiscal Consolidation in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(4), pages 306-326, August.
    17. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
    18. Gunter Coenen & Roland Straub & Mathias Trabandt, 2012. "Fiscal Policy and the Great Recession in the Euro Area," American Economic Review, American Economic Association, vol. 102(3), pages 71-76, May.
    19. Ambriško, Róbert & Babecký, Jan & Ryšánek, Jakub & Valenta, Vilém, 2015. "Assessing the impact of fiscal measures on the Czech economy," Economic Modelling, Elsevier, vol. 44(C), pages 350-357.
    20. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521547871, September.
    21. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, May.
    22. Ingram, Beth F. & Whiteman, Charles H., 1994. "Supplanting the 'Minnesota' prior: Forecasting macroeconomic time series using real business cycle model priors," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 497-510, December.
    23. Raffaella Giacomini, 2013. "The relationship between DSGE and VAR models," CeMMAP working papers CWP21/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    24. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Robert Ambrisko, 2019. "Fiscal Devaluation in a Small Open Economy," Russian Journal of Money and Finance, Bank of Russia, vol. 78(1), pages 67-88, March.
    2. Zdeněk Pikhart, 2019. "Fiskální impuls a pokrizový odhad fiskálních multiplikátorů v české republice [Fiscal Impulse and Post-crisis Estimate of Fiscal Multipliers in the Czech Republic]," Politická ekonomie, Prague University of Economics and Business, vol. 2019(6), pages 577-592.
    3. DJINKPO, Medard, 2019. "A DSGE model for Fiscal Policy Analysis in The Gambia," MPRA Paper 97874, University Library of Munich, Germany, revised 30 Dec 2019.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Babecký, Jan & Franta, Michal & Ryšánek, Jakub, 2018. "Fiscal policy within the DSGE-VAR framework," Economic Modelling, Elsevier, vol. 75(C), pages 23-37.
    2. Thorsten Drautzburg, 2020. "A narrative approach to a fiscal DSGE model," Quantitative Economics, Econometric Society, vol. 11(2), pages 801-837, May.
    3. Warne, Anders & Coenen, Günter & Christoffel, Kai, 2010. "Forecasting with DSGE models," Working Paper Series 1185, European Central Bank.
    4. Paccagnini, Alessia, 2017. "Dealing with Misspecification in DSGE Models: A Survey," MPRA Paper 82914, University Library of Munich, Germany.
    5. Ambriško, Róbert & Babecký, Jan & Ryšánek, Jakub & Valenta, Vilém, 2015. "Assessing the impact of fiscal measures on the Czech economy," Economic Modelling, Elsevier, vol. 44(C), pages 350-357.
    6. Michal Franta, 2012. "Macroeconomic Effects of Fiscal Policy in the Czech Republic: Evidence Based on Various Identification Approaches in a VAR Framework," Working Papers 2012/13, Czech National Bank.
    7. Lindé, Jesper & Smets, Frank & Wouters, Rafael, 2016. "Challenges for Central Banks´ Macro Models," Working Paper Series 323, Sveriges Riksbank (Central Bank of Sweden).
    8. Stanova, Nadja, 2015. "Effects of fiscal shocks in new EU members estimated from a SVARX model with debt feedback," MPRA Paper 63148, University Library of Munich, Germany.
    9. Quaghebeur, Ewoud, 2019. "Learning And The Size Of The Government Spending Multiplier," Macroeconomic Dynamics, Cambridge University Press, vol. 23(8), pages 3189-3224, December.
    10. Boubaker, Sabri & Nguyen, Duc Khuong & Paltalidis, Nikos, 2018. "Fiscal policy interventions at the zero lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 297-314.
    11. Anna Kormilitsina & Sarah Zubairy, 2018. "Propagation Mechanisms for Government Spending Shocks: A Bayesian Comparison," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1571-1616, October.
    12. Patrick Fève & Jean‐Guillaume Sahuc, 2017. "In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(3), pages 704-718, April.
    13. Gupta, Rangan & Steinbach, Rudi, 2013. "A DSGE-VAR model for forecasting key South African macroeconomic variables," Economic Modelling, Elsevier, vol. 33(C), pages 19-33.
    14. Mumtaz, Haroon & Theodoridis, Konstantinos, 2020. "Fiscal policy shocks and stock prices in the United States," European Economic Review, Elsevier, vol. 129(C).
    15. Alessia Paccagnini, 2012. "Comparing Hybrid DSGE Models," Working Papers 228, University of Milano-Bicocca, Department of Economics, revised Dec 2012.
    16. Johannes Hermanus Kemp & Hylton Hollander, 2020. "A medium-sized, open-economy, fiscal DSGE model of South Africa," WIDER Working Paper Series wp-2020-92, World Institute for Development Economic Research (UNU-WIDER).
    17. Warne, Anders & Coenen, Günter & Christoffel, Kai, 2013. "Predictive likelihood comparisons with DSGE and DSGE-VAR models," Working Paper Series 1536, European Central Bank.
    18. Frank Schorfheide & Francis X. Diebold & Marco Del Negro, 2008. "Priors from Frequency-Domain Dummy Observations," 2008 Meeting Papers 310, Society for Economic Dynamics.
    19. Paola Mariell Brens Ortega, 2020. "An Econometric Analysis of a Calibrated Macroeconomic Model for the Dominican Republic: A Closer Look into Monetary Policy," Documentos de Trabajo 18253, The Latin American and Caribbean Economic Association (LACEA).
    20. Ulrich Gunter, 2019. "Estimating and forecasting with a two-country DSGE model of the Euro area and the USA: the merits of diverging interest-rate rules," Empirical Economics, Springer, vol. 56(4), pages 1283-1323, April.

    More about this item

    Keywords

    DSGE-VAR model; fiscal multipliers; fiscal shocks; identification; model misspecification;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cnb:wpaper:2016/09. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jan Babecky (email available below). General contact details of provider: https://edirc.repec.org/data/cnbgvcz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.