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Parameter Uncertainty and the Fiscal Multiplier

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Abstract

I present a simple estimated model of the New Zealand economy which is used to assess the sensitivity of the impact multiplier and output losses associated with fiscal consolidations to uncertainty over model parameters. I find that, in normal times, the fiscal multiplier can be expected to lie between 0.1 and 0.5, with a central estimate of 0.3. Uncertainty over the output effects of fiscal tightening can be attributed to several model parameters and it is found that a bad outcome is likely to be worse than a good outcome is to be better – output risks are skewed to the downside. Sensitivity analysis reveals that if monetary policy in New Zealand were to be constrained by the zero-lower bound, the fiscal impact multiplier would rise substantially, consistent with the empirical evidence for other OECD countries in that position.

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  • Jamie Murray, 2013. "Parameter Uncertainty and the Fiscal Multiplier," Treasury Working Paper Series 13/19, New Zealand Treasury.
  • Handle: RePEc:nzt:nztwps:13/19
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    File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2013/13-19/twp13-19.pdf
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    More about this item

    Keywords

    Fiscal impact multiplier; Ricardian equivalence; DSGE; SVAR; consolidation; monetary policy; uncertainty; lower bound;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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