stimulus. Accounting for any anticipated future consolidation would weaken its effects.
3
Similarly,
financial market participants in the model are insensitive to any announced information on the fu-
ture developments in interest rates, or other monetary policy measures known in advance. This
eliminates the power of forward guidance that is present in DSGE models and weakens the potency
of monetary policy make-up rules, which largely work through anticipation channels (see Hebden
et al. (2020) for the analysis of the effects of expectations on monetary policy make-up rules).
The quantitative responses of the ECB-BASE model to macroeconomic shocks are assessed in
Angelini et al. (2019) by benchmarking the model results against comparable models, including
semi-structural and DSGE models. One further reference for assessment can be found in the ’Basic
Model Elasticities’ (BMEs). These BMEs are developed by the National Banks of the Eurosystem
and are used regularly in the forecast exercises. They condense the views of modellers and forecasters
in the Eurosystem on the propagation of macroeconomic shocks.
4
To address a potential criticism
that the model gives too much power to fiscal policy and too little potency to monetary policy we
cross-check the effects fiscal and monetary policy shocks with the BMEs as well. It turns out that
government spending multipliers are broadly consistent with those embedded in the BMEs and the
effects of monetary policy are greater than according to the BMEs.
5
Based on this benchmarking
against reference models, we conclude that the power of the two policies is balanced.
One of the major advantages of the ECB-BASE model is its close link to the current conjunc-
tural developments. The model is firmly anchored not only in the historical data but also in the
Eurosystem projections. In particular, the baseline of the post-pandemic exercise reflects recent
macroeconomic projections.
6
As such, the model takes a comprehensive account of the current
3
The standard RBC/ NK model features infinitely-lived households, whose consumption decisions at any point in
time are based on an intertemporal budget constraint. Ceteris paribus, an increase in government spending lowers
the present value of after-tax income, thus generating a negative wealth effect that induces a cut in consumption.
In this context, standard macroeconomic models feature strong Ricardian effects, which are sometimes at odds with
empirical findings (e.g. Blanchard and Perotti (2002)). Against this background, a vast amount of studies established
models, where the Ricardian effects are weakened (see, for instance, Gali et al. (2007), which added rule-of-thumb
households).
4
The BMEs have been developed in the context of the Eurosystem projections and they summarise the effects of
changes in assumptions (including fiscal and financial assumptions) on macroeconomic variables. They can be inter-
preted as a simplified version of the macroeconomic models used by National Central Banks for economic projections.
As such, they constitute a benchmark for the assessment of fiscal and monetary policy in a macro model. ECB (2016)
provides details on BMEs and their application in the projections.
5
The comparison of policy effects cannot be shown in this paper on account of the fact that the BME elasticities
are not made available to the public.
6
The baseline of the post-pandemic horizon exercise presented in the paper is broadly in line with the December
ECB Working Paper Series No 2623 / December 2021