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

Stancu, Stefania (2024): The effects of fiscal policy during COVID-19 pandemic in Romania. The results of a DSGE model with financial frictions.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: fiscal policy, DSGE model, COVID-19, financial accelerator
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H1 - Structure and Scope of Government > H12 - Crisis Management; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents

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