Fiscal Policy in An Estimated Dynamic Stochastic General EquilibriumModel

Master Thesis by Wenchuan Chen
July 23, 2007

Abstract:

In this paper we follow closely with "An Estimated Dynamic Stochastic
General Equilibrium Model of the Euro Area" by Frank Smets and Raf
Wouters and supplement their model with consumption tax rate, capital
tax rate and labor tax rate and lump sum tax. We solve the extended model,
loglinearize it and implement it into Toolkit and Dynare. Then it is estimated
with Bayesian techniques using observed marcoeconomic time
series. Estimated parameters and standard deviations of shocks from our
extended model using the same dataset used by Smets andWouters (2003)
agree with those values published in Smets and Wouters (2003). But after
adding two more time series into observed data and detrending them
by HP filter, the estimation results vary from those of Smets and Wouters
(2003). The differences may come from more observation or different detrending
tools.