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

Bhattarai, Keshab; Trzeciakiewicz, Dawid

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 long-run. 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.

Citation

Bhattarai, K., & Trzeciakiewicz, D. (2017). Macroeconomic impacts of fiscal policy shocks in the UK : a DSGE analysis. Economic modelling, 61, 321-338. https://doi.org/10.1016/j.econmod.2016.10.012

• Journal Article Type: Article
• Acceptance Date: Oct 27, 2016
• Online Publication Date: Dec 1, 2016
• Publication Date: 2017-02
• Deposit Date: Dec 7, 2016
• Publicly Available Date: Dec 7, 2016
• Journal: Economic modelling
• Print ISSN: 0264-9993
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 61
• Pages: 321-338
• DOI: https://doi.org/10.1016/j.econmod.2016.10.012
• Keywords: Fiscal policy; DSGE model; UK economy
• Public URL: https://hull-repository.worktribe.com/output/446006
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S0264999316305983
• Additional Information: Authors' accepted manuscript of article published in: Economic modelling, 2016