Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis

Abstract

This paper develops and estimates a new-Keynesian dynamic stochastic general equilibrium (DSGE) model for the analysis of fiscal policy in the UK. We find that government consumption and investment yield the highest GDP multipliers in the short-run, whereas capital income tax and public investment have dominating effect on GDP in the longrun. When nominal interest rate is at the zero lower bound, consumption taxes and public consumption and investment are found to be the most effective fiscal instruments throughout the analysed horizon, and capital and labour income taxes are established to be the least effective. The paper also shows that the effectiveness of fiscal policy decreases in a small open-economy scenario and that nominal rigidities improve effectiveness of public spending and consumption taxes, whereas decrease that of income taxes.

Expansionary Contractions and Fiscal Free Lunches: Too Good To Be True?

“…We set our debt aversion parameter, φ TR , at 0.18 such that the debt is repaid slowly over the long run (it takes over 100 quarters for the debt to halve); as we focus on short‐ and medium‐run multipliers our results are not significantly affected by this parameter (sensitivity on this is performed below). The calibration values of the fiscal parameters are in line with those found for the United Kingdom, and are not too dissimilar from those of other countries (e.g., Bhattarai and Trzeciakiewicz, ).…”

Structural fiscal balances of the UK: a state-space DSGE approach

“…The baseline calibration of these fixed parameters relies on previous studies on the UK economy by such as Faccini, Millard and Zanetti (2011) and Bhattarai and Trzeciakiewicz (2012). For persistence parameters of AR(1) processes, their prior means are all set to be a standard value 0.7 and they are all subject to a beta distribution with the stand deviation equal to 0.1, following Funke, Paetz and Pytlarczyk (2011) and Bhattarai and Trzeciakiewicz (2012). For the corresponding parameters of SDs, inverse gamma distributions are used as their priors according to the standard convention, such as in Smets and Wouters (2007), Del Negro and Schorfheide (2008) and Lafourcade and Wind (2012).…”

“…To account for these calibrated parameters' influence on the estimation results, robustness checks will be executed at last by using alternative values for these parameters. The baseline calibration of these fixed parameters relies on previous studies on the UK economy by such as Faccini, Millard and Zanetti (2011) and Bhattarai and Trzeciakiewicz (2012). For persistence parameters of AR(1) processes, their prior means are all set to be a standard value 0.7 and they are all subject to a beta distribution with the stand deviation equal to 0.1, following Funke, Paetz and Pytlarczyk (2011) and Bhattarai and Trzeciakiewicz (2012).…”

Principles of Modeling of the General Economic Equilibrium

“…Аналогічним чином, 1 З точки зору теорії корисності роль грошового запасу в цих функціях можна пояснити таким чином. Зі збільшенням грошового запасу його загальна корисність зростає, але гранична -зменшується, і навпаки.…”