Fiscal asymmetries under a debt consolidation strategy: Evidence from Colombia

Abstract

This paper develops and implements a fiscal DSGE model tailored to Colombia, a small and open emerging economy (SOEE). The study focuses on the asymmetric effects of fiscal consolidation strategies in this context. The model, constructed as a New-Keynesian DSGE framework, is estimated using Bayesian techniques with data specific to the Colombian economy and relevant external variables. It includes heterogeneous households (Ricardian and non-Ricardian), domestic producers of final and intermediate goods, importers, exporters, and a national government responsible for fiscal policy and a central bank responsible for monetary policy. Key frictions such as the formation of consumption habits, capital stock utilization, risk-adjusted uncovered interest rate parity, and price and wage rigidities are also included. The results suggest that fiscal multipliers vary significantly depending on the fiscal instrument used, with spending cuts having a more contractionary effect on output than tax increases. Moreover, consolidation measures fall severely on non-Ricardian households, exacerbating income inequality. The model highlights fiscal asymmetries, showing that sectors more dependent on public spending face contractions under fiscal consolidation. These findings provide valuable insights into the dynamics of fiscal and monetary policy in SOEEs and serve as an important tool for policy analysis and economic forecasting in emerging markets such as Colombia.