De makroekonomiska effekterna av covid-19 i Finland – en DSGE-scenarioanalys

The exogenous event of COVID-19 took the world by surprise in 2020. Much of the early literature focused on modelling the pandemic dynamics in economic models (e.g., DSGE models) and examined macroeconomic effects and scenarios , mapping potential economic and humanitarian outcomes. Both real business cycle and new Keynesian models have been applied, in parallel with relevant frictions and aggregate health dynamics. The literature mainly studied the U.S. and the Euro area. This thesis builds on the DSGE studies on the macroeconomic effects of the pandemic, utilizing a NK-DSGE model with wage rigidities, consumption habit formation, Ricardian and rule-of-thumb households, investment adjustment costs, costs related to the level of utilization of installed capacity as well as a government and a central bank based on Costa (2016). It also includes price indexation and identifies three COVID-19 shocks. The productivity shock and the labor supply shock constitute the supply-side disturbances. The consumption preference shock serves as a demand-side disturbance. The model is calibrated to fit the Finnish economy, based on the results of Kilponen et al. (2016). They explain that the Finnish environment differs from other DSGE models in several ways. These differences may have qualitative and quantitative implications for the COVID-19 shock and government responses. Based on this assumption, this thesis examines the macroeconomic dynamics of the COVID-19 shocks and the monetary and fiscal responses in a Finnish environment. The inclusion of Ricardian and non-Ricardian households allows for an investigation of the effects of a government discretionary shock and whether it leads to an increase in private consumption as in Galí et al. (2007). This study also maps the welfare effects of the shocks given the heterogeneity of the households. Lastly, it considers a mild and a severe shock scenario and inspects the effects on the Finnish economy. The results reveal that the Finnish environment may have important implications for the dynamics of the shocks and for optimal fiscal and monetary responses. Low price stickiness and high wage rigidity and habit formation affects household decisions and may result in a fall in private consumption given a positive government discretionary shock. Additionally, the high investment adjustment cost causes investments to adjust sluggishly to the shocks. The inflation dynamics and central bank policy trade-offs fundamentally depend on whether the environment is dominated by demand-side or supply-side disturbances (stage of the pandemic), as the latter may cause stagflation, increased steering rates and worsened debt sustainability. Furthermore, the rule-of-thumb consumer is worse off compared to the Ricardian counterpart, revealing potential asymmetric welfare effects. The results also show that monetary policy is unable to improve welfare by increasing the output-reaction term in the Taylor rule. The focus should be on price stability, according to the model. However, the government can improve welfare by increasing the strength of the automatic stabilizers (e.g., by increasing transfers to households). The discretionary policy shock also stimulates output at the risk of crowding out private consumption and investment. Additionally, the already strained debt sustainability problem in Finland is worsened