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Description

This program provides a dynamic stochastic general equilibrium model for the analysis of fiscal policy. In particular, a menu driven Windows stand-alone application allows you to play minister of finance. Your changes of taxation and public spending will imply model-based consequences on macroeconomic variables such as GDP, consumption, and hours worked. Your performance will be measured by the change in the welfare due to your policy decisions. 

For better understanding of the mechanisms, the following scenarios shall illustrate how an economy reacts if crucial determinants e.g. taxes are changed. The analysis is based on a theoretical model. It is important to consider the simplifying assumptions therein when interpreting the results. Hence, the presented inferences can be used for policy advise only in a  careful way. Nonetheless the simulations explicitely demonstrate the complexity of the various effects even in a fairly simple model.

Following assumptions are made:

1. In the model households are assumed to be identical, that is, every household has the same preferences about leisure and consumption. Moreover, that means that all households can provide the same amounts of capital and labor.

2.  In addition, all firms are identical: all jobs are equal, structural change does not occur, hence there is no possible unemployment due to missing/wrong qualification.

3. A closed economy is assumed: external trade and international flow of capital are neglected.

4. Moreover, fully flexible prices and perfect competition is assumed - thus, a perfectly functioning market economy where governmental regulation is not necessary to achieve the efficient solution.

5. Another simplifying assumption is considered in this context: in this model public spending does neither increase productivity nor is it required for purchasing public goods. Public spending, in terms of government purchases,  are rather subsidies (e.g. for cultural institutions or security) which raise the households utility but are not productive. Child allowance or social benefits are denoted  as »transfers« and are not included in public spending.

6. Evaluating political actions is done by considering the change in households' utility. This utility depends positively on private consumption and government purchases. However, higher labor input  in this case impacts utility negatively as increasing employment here does not mean decreasing unemployment. Instead it signifies increasing working hours for the individual household in contrast to the usual perception.

The Finanzminister-model in detail:

Are you interested in the mathematical background of the Minister of Finance model?

Then you have the possibility to get to know the details here: you will find everything in this pdf-file, starting with the description of the model, the first order conditions and the steady state equations up to the log-linearization of the equilibrium conditions.