Autonomous Demand Composition and Fiscal Policy in a Supermultiplier Simulation Model

Abstract

The paper aims to analyze the influence of autonomous demand composition on the impact of fiscal policy on the economic performance of an economy. To do so, we develop a super multiplier simulation model for a small open economy. In our simulations, we use two sets of exogenous variables and parameter combinations. The main differences between these two sets are that in Country 1, the government expenditure share in total autonomous demand is relatively high, and the economy is more inward-oriented. In contrast, in Country 2, the government expenditure share is relatively low, and the economy is more outward-oriented. We then simulate the impact of the same temporary shock on GDP growth and the debt to GDP ratio in both countries of a fiscal policy that follows a stylized structural balance rule. The main result obtained from the simulation exercise points to the importance of the government share in total autonomous expenditure as the factor explaining the diverging economic performance regarding GDP growth and the debt to GDP ratio under the same fiscal policy.

JEL classification: E12 ; E13 ; E62 ; H63