The Shock Reaction in a Simple Close Economy

Abstract

As the general objective of a representative government is to achieve in creating the economic conditions that support the wellbeing of citizen, it, thus, needs to design and implement its policies in an appropriated manner. Hence, to support the valuable information for designing and implementing such policies, this work is designed to gain that information by trying to identify the reactions of various variables to government policies. To meet this objective, this work proposed a simple close economy Dynamic stochastic general equilibrium (DSGE) model with the public goods in the household consumption bundle. Also, the usual shocks studied in the DSGE model were included in the reaction investigation process. The Bayesian technique is then employed to estimate the model parameters by using the quarterly detrended data of Thailand in the period of 2001 to 2019. The result showed the crowding-out effect driven by government spending. Also, the reactions of the major macroeconomic variables to each shock were consistent with some previous studies. Key-words: DSGE, Close Economy, monetary policy, fiscal policy, Bayesian Estimation Received: March 15, 2021. Revised: May 10, 2021. Accepted: May 17, 2021. Published: May 24, 2021.