Fiscal policy in an SNA-Compliant DSGE model for emerging markets

Abstract

Fiscal policy is often one of the economic Achilles heels of emerging markets. Therefore, adequately modeling it becomes crucial to understanding the effects of shocks impacting this class of economies. This paper seeks to make a new proposal on how to model an emerging market such as Brazil, with a particular emphasis on the fiscal side. To that end, we build a medium-scale open-economy DSGE model, enriched with a detailed government structure and a comprehensive array of fiscal tools. We then compare the effects of some relevant shocks to those generated by the Central Bank of Brazil’s DSGE workhorse model, SAMBA. Additionally, we analyze several fiscal structural reforms that have been suggested or implemented within the last decade. Our results show that our model does a good job of reproducing the movements of key economic variables, shedding light on the fiscal dynamics and their interactions with monetary policy and external shocks. Introducing Stone–Geary (subsistence) preferences for non-Ricardian households strengthens empirical realism without altering our main conclusions.