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Adding a fiscal rule into a DSGE model: How much does it change the forecasts?

Mikhail Andreyev ()

No wps64, Bank of Russia Working Paper Series from Bank of Russia

Abstract: This article analyses an expansion of the dynamic stochastic general equilibrium model presented in Kreptsev, Seleznev (2017) and used by the Bank of Russia to forecast macroeconomic variables. The model was supplemented with an extended description of the fiscal sector, which formalises the fiscal rule in effect in Russia and which is similar to the one used in Medina, Soto (2007). The model was estimated on the basis of Russian data. Based on impulse response functions, we analyse the stabilising effect of the fiscal rule on macroeconomic variables. It was found that the fiscal rule leads to a decrease in output volatility, a slight decrease in exchange rate volatility and a stronger disinflationary effect in response to a positive oil price shock. The forecast errors were used to analyse whether it is possible to apply the formalisation of the fiscal rule in order to improve the forecast of macroeconomic variables within the DSGE model. We found that the fiscal rule does not improve the quality of the forecasts.

Keywords: DSGE model; fiscal rule; reserve fund; credit cycle; commodity prices; financial frictions; monetary policy (search for similar items in EconPapers)
JEL-codes: D58 E47 E62 E63 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2020-11
New Economics Papers: this item is included in nep-cis, nep-dge and nep-mac
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