Fiscal Policy in a Structural CGE Model: Simulations for the Netherlands of the 1980’s

Abstract

The Netherlands experience with the use of fiscal policy in times of low growth is often quoted as an example of the better performing experiences, also renamed as the ‘Dutch miracle’. This has been generally true for the Netherlands since the 1980’s, when compared to other countries. The paper examines this experience for the 1980’s at the hand of a CGE model.

The model is used to run policy simulations of revenue and spending instruments. Two revenue reducing policy simulations are considered: (a) reduction of indirect tax in the services sector by 4.4%, and (b) instituting a wage subsidy equal to 0.46% of the wage bill.

The policy simulations are applied to three forms of the CGE models, and their effects analyzed. The three forms are labeled the basic, the elaborate, and the structural CGE Model; which progressively give more realistic descriptions of the Dutch economy.

Keywords: Structural CGE model, fiscal policy, wage subsidy, Netherlands

JEL Classification: E16, E17, H5, H6, J13, O21