Template-Type: ReDIF-Paper 1.0
Author-Name: Ginters Buss
Author-X-Name-First: Ginters	
Author-X-Name-Last: Buss
Author-Workplace-Name: Latvijas Banka
Author-Name: Patrick Gruning
Author-X-Name-First: Patrick	
Author-X-Name-Last: Gruning
Author-Workplace-Name: CEFER, Lietuvos Bankas
Title: Fiscal DSGE Model for Latvia
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. 
Creation-Date: 2020-12-15
File-URL: https://datnes.latvijasbanka.lv/papers/wp_5_2020_en.pdf
File-Format: Application/pdf
Number: 2020/05
Classification-JEL: E0, E2, E3, F4, H2, H3, H6
Keywords: small open economy,  fiscal policy, fiscal rules,  Bayesian estimation
X-File-Ref: https://repec.bank.lv/refs/wpaper202005.txt
Handle: RePEc:ltv:wpaper:202005