Fiscal policy in contemporary DSGE models

Virginia Queijo von Heideken and Ferre De Graeve
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Virginia Queijo von Heideken: Sveriges Riksbank

No 74, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: The role of fiscal policy in DSGE models has long been ignored. Recent evidence from reduced-form VARs (Sims (2011)), event-studies (Leeper et al. (2012)) and structural models (Fernández-Vilaverde et al. (2012)) shows that information about fiscal variables can add to macroeconomic models. To strongly convey the point that DSGE models should take fiscal policy seriously, we show that even without any information on fiscal variables standard contemporary DSGE models map historical fluctuations to fiscal policy. We estimate a version of the Smets-Wouters model and show that the model interprets changes in long-term interest rates, unrelated to current short rates, as news about fiscal policy through the effect it may have on future inflation. This interpretation is exactly the one Sims (2011) and Leeper and Walker (2012) argue for.

Date: 2012
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:74

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