The Effects of Fiscal Policy in New Zealand: Evidence from a VAR Model with Debt Constraints

Abstract

This article investigates the macroeconomic effects of fiscal policy in New Zealand using a structural vector autoregression (SVAR) model. The model is the five‐variable SVAR framework proposed by Perotti (2005), further augmented to allow for the possibility that taxes, spending and interest rates might respond to the level of the debt over time. We examine the dynamic responses of output, inflation and the interest rate to changes in government spending and revenues and analyse the contribution of shocks to New Zealand's business cycle for the period 1983:1–2010:2. We find that the effects of government expenditure shocks in New Zealand appear to be positive but small in the short run at the cost of higher interest rates and lower output in the medium to long run. The sign of the effects of tax policy changes are less clear‐cut, but again the effects on GDP appear similarly modest. Past fiscal policy is analysed through a historical decomposition of the shocks in the model. This suggests that discretionary fiscal policy has had a generally pro‐cyclical impact on GDP over the past 15 years, and a material impact on the real long‐term interest rate. A fiscal expansion has a positive but limited impact on inflation.

Economic and non-economic determinants of Iranian pharmaceutical companies’ financial performance: an empirical study

“…Historical decomposition answers the question of what proportion of the deviation of TEP from its unconditional mean is due to each structural shock. Using the Wald decomposition [34] and some backward substitutions, the variable Z t in equation [3] can be modeled as a function of its initial values (Z 0 ) plus all the structural shocks of the model as equation (7) [35]: …”

Government Size, Government Debt and Economic Performance with Particular Application to New Zealand

“…The concern here is with both long-and short-run reasons for expenditure and debt changes and their effects on economic performance, whether the fiscal response is built to respond automatically to the business cycle or is the result of explicit discretionary policy choice. For examples of VAR multiplier analysis, see Claus et al (2006) and Parkyn and Vehbi (2013). estimated jointly so that estimation can capture the long-run considerations in determining government size and output interacting with the shorter run objectives of counter-cyclical policy.…”

The macroeconomic effects of government spending shocks in New Zealand

“…New Zealand has attracted little attention so far in the literature. To my best knowledge, there are very few papers estimating the macroeconomic effects of government spending shocks in New Zealand, including Claus et al (2006), Dungey and Fry (2009), Fielding (2014), Parkyn and Vehbi (2014), and Hamer-Adams and Wong ( 2018) which all find multipliers smaller than 1 or even negative. Among these studies, Hamer-Adams and Wong ( 2018) is the only one distinguishing between government consumption and investment.…”