Fiscal DSGE Model for Latvia

Patrick Grüning () and Ginters Buss
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Patrick Grüning: Bank of Lithuania & Vilnius University

No 81, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: We develop a fiscal dynamic stochastic general equilibrium (DSGE) model for policy simulation and scenario analysis purposes tailored to Latvia, a small open economy in a monetary union. The fiscal sector elements comprise government investment, government consumption, government transfers that are asymmetrically directed to both optimizing and hand-to-mouth households, cyclical unemployment benefits, foreign ownership of government debt, import content in public consumption and investment, and fiscal rules for each fiscal instrument. The model features a search-and-matching labour market friction with pro-cyclical labour costs, a financial accelerator mechanism, and import content in final goods. We estimate the model using Latvian data, study the new channels in the model, and provide a comprehensive analysis on the macroeconomic effects of the fiscal elements. A particular finding is that having foreign ownership of government debt generally breaks the Ricardian equivalence paradigm.

Keywords: Small open economy; Fiscal policy; Fiscal rules; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E0 E2 E3 F4 H2 H3 H6 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2020-12-14
New Economics Papers: this item is included in nep-cis, nep-cmp, nep-dge, nep-mac and nep-tra
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Related works:
Journal Article: Fiscal DSGE model for Latvia (2023)
Working Paper: Fiscal DSGE Model for Latvia (2020)
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