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THE EFFECTS OF FISCAL POLICY IN AN ESTIMATED DSGE MODEL—THE CASE OF THE GERMAN STIMULUS PACKAGES DURING THE GREAT RECESSION

  • Andrej Drygalla (a1), Oliver Holtemöller (a1) (a2) and Konstantin Kiesel (a3)
Abstract

In this paper, we analyze the effects of the stimulus packages adopted by the German government during the Great Recession. We employ a standard medium-scale dynamic stochastic general equilibrium (DSGE) model extended by non-optimizing households and a detailed fiscal sector. In particular, the dynamics of spending and revenue variables are modeled as feedback rules with respect to the cyclical components of output, hours worked and private investment. Based on the estimated rules, fiscal shocks are identified. According to the results, fiscal policy, in particular public consumption, investment, and transfers prevented a sharper and prolonged decline of German output at the beginning of the Great Recession, suggesting a timely response of fiscal policy. The overall effects, however, are small when compared to other domestic and international shocks that contributed to the economic downturn. Our overall findings are not sensitive to considering fiscal foresight.

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Corresponding author
Address correspondence to: Andrej Drygalla, Halle Institute for Economic Research (IWH), Kleine Maerkerstrasse 8, 06108 Halle (Saale), Germany; e-mail: andrej.drygalla@iwh-halle.de. Phone: +49 345 7753 812.
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We would like to thank Claudia Buch, Alexander Kriwoluzky, Mathias Trabandt, Maik Wolters, Götz Zeddies, and anonymous referees for their helpful comments. The paper has also benefited from comments by participants at the IWH-CIREQ macroeconometric workshop, the 2nd ifo Dresden workshop on the macroeconomy and business cycle, the KOF-ETH-UZH seminar in international economic policy, the SMYE 2015 in Ghent, the RGS doctoral conference 2015 in Essen, and a presentation given at the Bank of Japan. Financial support by the German Ministry of Finance in the context of the research project fe 4/12 “Ökonomische Wirksamkeit der Konjunktur stützenden finanzpolitischen Maßnahmen der Jahre 2008 und 2009” is acknowledged.

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Macroeconomic Dynamics
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