Tunisian Fiscal Policy Effects in a New Keynesian Model With Price Rigidity and Monopolistic Competition

Abstract

This paper applies a multivariate neo-Keynesian DSGE model to study the effects of changes in Tunisian public spending on the business cycle, private consumption, wages, interest rate, and inflation rate in the presence of monopolistic competition and price nominal short-term rigidity. The main finding of this paper shows a Tunisian pro-cyclical fiscal policy. Expansionary public spending has two initial effects. The output increases due to the usual increase in labor supply, and aggregate demand increases due to an incomplete crowding out of private consumption. By increasing aggregate demand, the central bank increases the nominal interest rate, which moves in concert with inflation in order to counteract inflationary pressures. Households reduce their consumer spending at the same time as the real interest rate increases. Some companies are responding to the change in the interest rate by reducing their expenses, their employment demands, and their capital utilization rates.