Fiscal Consolidation in General Equilibrium Framework (the case of the Czech Republic)

Within the non-stochastic dynamic general equilibrium model framework this paper examines the implications of alternative fiscal consolidation programs for small open economy. The calibrated model enables realistically quantify the impact of the deficit financing and fiscal consolidation on consumption and saving of households, investment of firms and thereby on the capital stock and real interest rates. Through the interest rate link the impact of deficit financing and fiscal consolidation on cyclical and long-term properties of monetary policy set-up can be observed. Several fiscal consolidations were simulated in order to demonstrate the comparative statics and differences in dynamic paths of above mentioned variables.