Dynamic Analysis of Fiscal Policy in the United Kingdom

Journal of Applied Econometrics, 2009

We propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions. Unlike most of the previous literature this approach does not require that the contemporaneous reaction of some variables to fiscal policy shocks be set to zero or need additional information, such as the timing of wars, in order to identify fiscal policy shocks. The paper's method is a purely vector autoregressive approach which can be universally applied. The approach also has the advantages that it is able to model the effects of announcements of future changes in fiscal policy and that it is able to distinguish between the changes in fiscal variables caused by fiscal policy shocks and those caused by business cycle and monetary policy shocks. We apply the method to US quarterly data from 1955-2000 and obtain interesting results. Our key finding is that the best fiscal policy to stimulate the economy is a deficit-financed tax cut and that the long term costs of fiscal expansion through government spending are probably greater than the short term gains.

Margin: The Journal of Applied Economic Research, 2012

In this article, we analyse the impact of fiscal shocks on the Indian economy using structural vector auto-regression (SVAR) methodology. The study uses quarterly data for the period 1997Q1–2009Q2. Two different identification schemes have been used to assess the effects of shocks on government spending and tax revenues on output. The recursive scheme is based on the Cholesky decomposition and the second identification scheme of Blanchard & Perrotti’s (1999) technique of using information on the tax system to identify the SVAR model. We find that the impulse responses obtained from both identification schemes behave in a similar fashion but the values of the multipliers differ. Also, the shock-to-tax variable has a bigger impact on gross domestic product (GDP) than the government spending shock. In the extended four variable VAR model, the effects of fiscal shocks on private consumption has been assessed using the recursive identification scheme. Findings indicate that the tax varia...

Applied Economics, 2011

We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression (B-SVAR) approach. We identify fiscal policy shocks via a partial identification scheme, but also: (i) include the feedback from government debt; (ii) look at the impact on the composition of output; (iii) assess the effects on asset markets; (iv) use quarterly data; and (v) analyse empirical evidence from the US, the UK, Germany and Italy. The results show that government spending shocks, in general, have a small effect on Gross Domestic Product (GDP); lead to important ‘crowding-out’ effects; have a varied impact on housing prices and generate a quick fall in stock prices. Government revenue shocks generate a mixed effect on housing prices and a small and positive effect on stock prices. The empirical evidence also suggests that it is important to explicitly consider the government debt dynamics in the model.

2009

Non-technical summary 5

2020

This paper analyzes the effects of fiscal policy shocks on a set of macroeconomic variables in Pakistan. The study adopts the SVAR framework and uses quarterly data of Pakistan from 1976:Q1 to 2018:Q4. Fiscal policy shocks are identified by incorporating the elasticity of fiscal variables as well as by taking decision lags in policy formulation to economic activity. The results showed that an increase in government developmental expenditure increases real GDP more than current expenditure, while current expenditure increases prices and developmental expenditure reduces prices. Prices are positively related with subsidies and defence expenditure, while negatively related with expenditure on social services. Tax revenue increases real GDP more than non-tax revenue, while tax revenue and non-tax revenue are both positively related with prices and negatively related with interest rate. An increase in direct tax has positive impact on prices and interest rate and negatively related with ...

RePEc: Research Papers in Economics, 2017

This paper analyzes jointly the effects of monetary and fiscal policy shocks in the US economy using a factor augmented vector autoregressive model with drifting coefficients and stochastic volatility. The time varying structure of the model allows to assess the impact of monetary policy shocks in the same periods when fiscal policy shocks identified via the narrative approach are also at play. In this way we study how the monetary policy transmission changes conditional on expansionary or contractionary exogenous fiscal policies, which are determined by the discretionary intervention of the fiscal authority and are not the response of business cycle fluctuations or the reaction to monetary policy. We find that fiscal policy strongly affects the impulse responses to monetary policy shocks through the aggregate demand channel. These results are relevant to understand the implications of different policy mixes.

2010

This preliminary study characterizes the dynamic effects of shocks in government spending and taxes on macroeconomic variables in Pakistan. It employs a five variable structural Vector Auto regression model covering the time period 1973:1-2008:4 for the variables GDP, inflation, the interest rate ,net taxes and government expenditure. The identification of fiscal policy shocks is achieved through two approaches; the recursive approach proposed by Fatas and Mihov (2001), and the structural VAR approach proposed by Blanchard and Perotti (2002).

Annales Universitatis Apulensis, 2013

In our research, we intend to observe the influence of fiscal policy together with the interest rate and inflation rate on economic growth in the European Union member states. Therefore, our goal is to identify the impact of the main instruments of fiscal policy, using an unrestricted panel VAR model, on the evolution of GDP. In this way we can understand what is the response of the GDP of the member states of EU 27 to the evolution of public debt, government deficit, government spending, interest rate and inflation. Using impulse response functions we have seen that private consumption has a positive influence on GDP, the rise in public debt has a negative influence on the evolution of GDP, government expenditure has an alternating influence that turns from positive in the first half of the observation period into negative in the second, the interest rate has a strong negative influence while the inflation rate has a positive influence on the evolution of GDP.

This study investigates the dynamic effects of fiscal policy shocks in Pakistan by using structural vector auto-regressive (SVAR) model for annual time series data from 1972 to 2014. To identify the effects of fiscal shocks on macro economy, four different identification approaches has been used i.e. Recursive approach, Blanchard and Perotti approach, Sign Restriction and Event Study approach for two different lags. Both sets of impulse responses gives the same results and support Mountford and Uhlig (2005) that different lag order has no effects on the whole results. While the impulse responses of all identification approaches give different results criticized Caldara and Kamps (2006) that different identification methods given the same results. The most common results provided both government expenditure and revenue shocks showed that an expansionary fiscal policy increased output only for short and medium term at the cost of high prices and have no significant effects in the long run.