Fiscal policy in the face of the health crisis: A simulation using a hybrid DSGE-SIR model

Abstract

This study employs a dynamic stochastic general equilibrium (DSGE) model, integrated with a Susceptible-Infected-Recovered (SIR) epidemiological framework, to assess the macroeconomic impacts of fiscal policy during the COVID-19 pandemic in Morocco. Calibrated with Moroccan COVID-19 data, the model links epidemiological dynamics to macroeconomic variables, offering a detailed analysis of fiscal interventions. The primary objective is to evaluate the effectiveness of various fiscal measures, including government spending shocks, consumption tax cuts, and labor tax reductions, in stimulating economic activity and supporting households and businesses impacted by the pandemic. The results indicate that government spending shocks significantly stimulated economic activity and employment, but also led to increased public debt and inflationary pressures, thereby illustrating the inherent trade-offs. Consumption tax cuts, intended to boost demand, had mixed effects on inflation; while prices for some goods declined, higher demand caused price increases in others. Labor tax reductions, aimed at enhancing employment, generated varied effects on labor supply and contributed to rising public debt due to lower tax revenues. The study underscores the necessity of balanced fiscal strategies to achieve both immediate economic recovery and long-term fiscal sustainability, highlighting the critical role of well-calibrated fiscal policies in mitigating the economic consequences of pandemics.