No 04-2010, Responses of the Polish economy to demand and supply shocks under alternative fiscal policy rules - P. Karp, M. Zachłod-Jelec

Recent experiences of many countries during the crisis restored the important dilemma that fiscal policymakers face of how to alleviate the demand contraction while ensuring sustainability of public finances in the long-term. In this paper we study the consequences of the demand and supply shocks for Poland under alternative policy scenarios. Using a macroeconometric model of the Polish economy, we analyse the response of the economy to shocks under several fiscal policy rules. We try to answer the questions which fiscal rule works best in terms of public finance sustainability and business cycle fluctuations stabilization while taking into account the source of shocks to the economy. We found that structural balance rule and expenditure rule act counter-cyclically in the whole simulation period, but at the same time the pace at which they stabilize public debt is quite slow.