Assessing the impact of fiscal measures on the Czech economy

We build a DSGE model to investigate the transmission of fiscal policy to the real economy in the Czech Republic. Departing from the elements of the Czech National Bank's current g3 forecasting model (Andrle, Hlédik, Kameník, and Vlček, 2009), we introduce a comprehensive fiscal sector incorporating a number of modeling features that are often neglected in the mainstream DSGE literature, e.g. allowing government consumption and government capital to be productive. Furthermore, we extend our fiscal model to include unemployment in a way proposed by Galí, López-Salido, and Vallés (2007). Crucial fiscal parameters, related mainly to the specified fiscal rule, are estimated using Bayesian techniques. The model is then used to calculate a set of fiscal multipliers for individual revenue and expenditure items of the government budget. We find that the largest real GDP fiscal multipliers in the first year are associated with government consumption (0.6), social security contributions paid by employers (0.6), and government investment (0.5).