Temporary subsidization of an import price shock

Hello everyone,

In my model, I want to analyze the effects of temporary fiscal measures in response to an import price shock.

The import price (P_i) is exogenously given and is increased by a shock (e_i):

log(P_i)=(1-rho) * log(steady_state(P_i (-1)))+rho * log(P_i (-1))+e_i

A portion of this price increase is intended to be offset by the government through subsidies, so that the effective costs (C_eff) for the import of I for the firms are as follows:

C_eff=P_i * I+sub * steady_state(I) * (steady_state(P_i) - P_i)

sub indicates the proportion of the cost increase that is subsidized by the government. However, the subsidies are only intended to be temporary from period 0 to 3. Therefore, I defined the variable sub as follows (kappa is just a scaling factor):


When I perform a stochastic simulation, changing sub has no effect on C_eff (with order=2). Is this because a change in sub has no effect in the steady state? However, with a deviation of P_i from steadystate, sub should have an effect on the effective cost.

Unfortunately, I couldn’t find anything about this issue in the forum so far, perhaps I haven’t found the right term for the topic. I would therefore also appreciate hints to appropriate threads.

Thank you in advance for your support.

How exactly do you conduct your simulation, i.e. which experiment/sequence of shocks are you conducting? It seems at second order there should indeed be an interaction effect.

Thank you, I found my mistake in the simulation.