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The effects of fiscal policy during COVID-19 pandemic in Romania. The results of a DSGE model with financial frictions

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  • Stancu, Stefania

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.

Suggested Citation

  • Stancu, Stefania, 2024. "The effects of fiscal policy during COVID-19 pandemic in Romania. The results of a DSGE model with financial frictions," MPRA Paper 121322, University Library of Munich, Germany, revised 2024.
    • Handle: RePEc:pra:mprapa:121322
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    References listed on IDEAS

    as
    1. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    2. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, March.
    3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    4. Drygalla, Andrej & Holtemöller, Oliver & Kiesel, Konstantin, 2020. "The Effects Of Fiscal Policy In An Estimated Dsge Model—The Case Of The German Stimulus Packages During The Great Recession," Macroeconomic Dynamics, Cambridge University Press, vol. 24(6), pages 1315-1345, September.
    5. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
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    More about this item

    Keywords

    fiscal policy; DSGE model; COVID-19; financial accelerator;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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