Investigating Effects of Government Spending Shock on Output and Inflation in Afghanistan: Dynamic Stochastic General Equilibrium Approach

Document Type : Original Article

Authors

1 Economics, Ferdowsi University of Mashhad, Iran

2 Faculty of Ferdowsi University of Mashhad

Abstract

This study aims to examine the fluctuations of fiscal policy (government expenditure shocks) on Afghanistan's economic performance, particularly on output and inflation, using a dynamic stochastic general equilibrium (DSGE) approach. Employing a general equilibrium model based on the New Keynesian macroeconomic theory,. The simulation results indicate that a sudden increase in government expenditure can stimulate economic growth and enhance output levels in Afghanistan. Furthermore, the findings suggest that expansionary fiscal policies can reduce unemployment rates and improve the employment situation in the country. However, fiscal policies should be designed considering budgetary constraints and the country’s economic capacities to ensure their long-term effectiveness. Excessive government spending in the long term, however, may lead to higher inflation rates and exacerbate budget deficits. Therefore, the coordination of fiscal and monetary policies, strict monitoring of public expenditures, and adopting transparency-based approaches can amplify the positive effects of fiscal policies while mitigating potential risks in Economics.

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Journal of Economics and Modelling
Volume 15, Issue 3 - Serial Number 59
December 2024
Pages 163-200

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