Saudi Arabia, currently the world’s largest oil exporter, embarked since 2021 on a large-scale National Investment Strategy (NIS) designed to lift potential GDP growth by diversifying the economy. This article describes the strategy and is the first paper to quantifies its impact on growth using a dynamic general equilibrium model. It also decomposes this impact into two main channels: the direct impact of the investment push and the impact of complementary reforms. We find that the overall strategy—when supported by appropriate fiscal measures, labor supply reform, and higher public sector efficiency— could boost potential non-oil growth by 4.8 percentage points to about 8.8 percent in the medium term. We also assess the growth dividends of a wider range of alternative scenarios around the NIS baseline.

This paper investigates dynamic relationships between U.S. government expenditure multipliers and the economy's cyclical position from 1949 to 2018 using a Time-Varying Parameter Vector Autoregression (TVP-VAR) model. We challenge the existing literature, which predominantly relies on predefined economic regimes and assumes a stable relationship between fiscal multipliers and business cycles. Our findings identify two distinct periods: fiscal multipliers were counter-cyclical from 1949 to the late 1980s, followed by a significant decline in their effectiveness during recessions thereafter. These variations are attributed to the prevailing fiscal-monetary policy mix; with higher fiscal multipliers during earlier recessions resulting from sharp shifts toward a fiscally led policy stance, followed by a decline after the Dot-com recession due to a transition toward a monetary-led policy mix. We find particularly low multipliers during the global financial crisis, which provides new insights into the evolving role of financial frictions in the transmission of fiscal policy.

We present alternative methods for calculating and interpreting the influence of exogenous shocks on historical episodes within the context of DSGE models. We show analytically why different methods for calculating shock decompositions can generate conflicting interpretations of the same historical episodes. We illustrate this point using an extended version of Drautzburg and Uhlig’s (2015) model of the U.S. economy, focusing on the periods 1964–1966, 1979–1987, 2006–2009, 2016–2020 and 2020–2023. We argue that the best method for analyzing particular episodes is one which isolates the influence of the shocks during the period under consideration and where the initial conditions represent the system’s distance from balanced growth path at the beginning of the episode.

For over two decades, Greece’s external position has been characterised by current account deficits and negative net foreign assets. The Recovery and Resilience Plan (RRP), supported by the EU’s Recovery and Resilience Facility (RRF), is a large-scale investment and reform programme, which may improve Greece’s economic and external prospects. How will a successful implementation of this plan affect the evolution of the country’s external position over the long term? Using a dynamic small open-economy general equilibrium model, we track the dynamic response of savings, investment, and external balances. We find that: (i) a successful RRP/RRF can go a long way towards unwinding Greece’s external imbalances, due to large increases in public savings; (ii) the RRP/RRF is, however, no magic bullet, and domestic policies remain critical. If macroeconomic policies stimulate domestic demand over and above the impulse generated from higher investments (through new tax cuts or looser macroprudential policies), even a successful RRP/RRF would fail to make a substantial dent in Greece’s net international investment position.

 This paper proposes a new digital-currency-enabled monetary policy tool: sector-specific cashback payments on private consumption expenditure. Using a two-sector New Keynesian model, we show how the monetary policy toolkit can benefit from adopting such instruments in two important instances. First, cashback payments provide a way to stimulate aggregate demand when the policy rate is at the zero lower bound without relying on the intermediate role of financial or corporate sectors in propagating liquidity injections. Secondly, we demonstrate how the adoption of simple cashback rate rules can produce a more efficient allocation of resources under asymmetric shocks compared to a simple implementable interest rate rule alone. The analysis proceeds to draw relationships between the size of the welfare gain associated with the introduction of these novel instruments and degrees of price stickiness, labour mobility, and relative size of the sectors.