Gauging the Effects of the German COVID-19 Fiscal Stimulus Package

We simulate the fiscal stimulus packages set up by the German government to alleviate the costs of the COVID-19 pandemic in a dynamic New Keynesian multi-sector general equilibrium model. We find that, cumulated over 2020-2022, output losses relative to steady state can be reduced by more than 4 PP. On average, welfare costs of the pandemic can be mitigated by 5%, and even by 20% for liquidity-constrained households. The long-run present value multiplier of the package amounts to 0.2. Consumption tax cuts and transfers to households primarily stabilize private consumption, and subsidies prevent firm defaults. The most cost-efficient measure is an increase in productivity-enhancing public investment. However, it materializes only in the medium to long-term