The macroeconomic effects of fiscal policy
AbstractThis thesis analyses the macroeconomic effects of changes in fiscal policy. Chapter 1 provides an overview. Chapter 2 estimates the macroeconomic effects of tax changes in the United Kingdom. Identification is achieved by constructing an extensive new 'narrative' dataset of 'exogenous' tax changes in the post-war U.K. economy. Using this dataset I find that a 1 per cent cut in taxes increases GDP by 0.6 per cent on impact and by 2.5 per cent over three years. These findings are remarkably similar to narrative-based estimates for the United States. Furthermore, 'exogenous' tax changes are shown to have contributed to major episodes in the U.K. post-war business cycle. The long appendix contains the detailed historical narrative and dataset. Chapter 3 estimates the endogenous feedback from output, debt and government spending to fiscal instruments in the United States. The central innovation is to make direct use of narrative-measured tax shocks in a DSGE model estimated using Bayesian methods. I therefore assume the tax shocks are observable, rather than latent variables. I show that the feedback from debt to the fiscal instruments is weaker than previously estimated and that the capital tax multiplier is higher. Moreover, the data are more consistent with a model with endogenous feedback than one with an exogenous fiscal policy specification. Chapter 4 examines the transmission mechanism of government spending shocks by constructing and estimating a DSGE model for the United States. I show that the endogenous response of different taxes and the strength of wealth effect on labour supply play a powerful role. Given that there is little prior information on the strength of these mechanisms, I estimate the key parameters in the model. I show that this estimated model can match the empirical responses of key variables that are a challenge for many models of this type.
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Bibliographic InfoPaper provided by University College London in its series Open Access publications from University College London with number http://discovery.ucl.ac.uk/1331876/.
Date of creation: 28 Sep 2011
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Publication status: Published
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-13 (All new papers)
- NEP-CBA-2011-12-13 (Central Banking)
- NEP-DGE-2011-12-13 (Dynamic General Equilibrium)
- NEP-MAC-2011-12-13 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nora Traum & Shu-Chun Yang, 2010.
"When Does Government Debt Crowd Out Investment?,"
Caepr Working Papers
2010-006, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
- Shu-Chun S. Yang & Nora Traum, 2010.
"Monetary and Fiscal Policy Interactions in the Post-war U.S,"
IMF Working Papers
10/243, International Monetary Fund.
- Traum, Nora & Yang, Shu-Chun S., 2011. "Monetary and fiscal policy interactions in the post-war U.S," European Economic Review, Elsevier, vol. 55(1), pages 140-164, January.
- Zubairy, Sarah, 2010. "Explaining the Effects of Government Spending Shocks," MPRA Paper 26051, University Library of Munich, Germany.
- Sarah Zubairy, 2010. "On Fiscal Multipliers: Estimates from a Medium Scale DSGE Model," Working Papers 10-30, Bank of Canada.
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