An empirical investigation of fiscal policy in New Zealand

New Zealand Treasury Working Paper 06/08

Published July 2006

Authors: Iris Claus, Aaron Gill, Boram Lee and Nathan McLellan

Abstract

This paper examines the effects of fiscal policy, measured by changes in government spending and net tax (government tax revenue less transfer payments), on New Zealand GDP. The framework of analysis is a structural vector autoregression (VAR) model of the New Zealand economy, employing and extending estimation techniques used by Blanchard and Perotti (2002). This model is then used to examine the dynamic effects of changes in government spending, taxes and transfers on GDP and the contributions of discretionary fiscal policy to New Zealand business cycles.

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Abstract Table of Contents List of Tables List of Figures List of Appendix Tables and Figures 1 Introduction 2 Model and data 2.1 Fiscal VAR and identification 2.2 Data 2.3 Time series properties of the data and trend specification 3 Effects of fiscal policy 3.1 Contemporaneous effects 3.2 Dynamic effects 4 Sensitivity analysis 4.1 Alternative specifications 4.2 Diagnostic tests 4.3 Alternative ordering of variables and elasticities 4.4 Comparison with other models and economies 5 Contributions of fiscal policy to New Zealand business cycles 5.1 Fiscal policy and New Zealand business cycles 5.2 Comparison with Treasury’s measure of fiscal impulse 6 Conclusions References Appendix A: Augmented Dickey-Fuller unit root tests Appendix B: Stability tests Appendix C: Normality and linearity tests Appendix D: Alternative ordering Appendix E: Alternative elasticities	twp06-08.pdf (487 KB) pp. 1–36
List of Tables Table 1 – Estimated contemporaneous coefficients Table 2 – Estimated contemporaneous coefficients: alternative model specifications Table 3 – GDP response to a government spending and net tax shock Table 4 – Cumulative GDP response to a spending/tax shock List of Figures Figure 1 – Variables used in the estimation of the fiscal VAR Figure 2 – Responses to a net tax shock Figure 3 – Responses to a government spending shock Figure 4 – Four variable VAR for the stochastic specification Figure 5 – Responses to a net tax and government spending shock: first difference model Figure 6 – Responses to a net tax and government spending shock: Hodrick-Prescott specification Figure 7 – Contribution of fiscal policy to New Zealand business cycles Figure 8 – Alternative measures of fiscal impulse List of Appendix Tables and Figures Appendix Table 1 – Unit root test results Appendix Table 2 – Stability test results for equations and individual parameters Appendix Table 3 – Stability test results for the fiscal VAR model Appendix Table 4 – Test results for normality of residuals Appendix Table 5 – Test results for linearity Appendix Figure 1 – Alternative ordering of net tax and government spending for the deterministic trend specification Appendix Figure 2 – Alternative ordering of net tax and government spending for the stochastic trend specification Appendix Figure 3 – Alternative ordering of net tax and government spending for the Hodrick-Prescott specification Appendix Figure 4 – Sensitivity tests for the impulse responses to net tax shock Appendix Figure 5 – Sensitivity test for the impulse responses to a government spending shock

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Abstract

List of Tables

List of Figures

List of Appendix Tables and Figures

1 Introduction

2 Model and data

3 Effects of fiscal policy

4 Sensitivity analysis

5 Contributions of fiscal policy to New Zealand business cycles

6 Conclusions

References

Appendix A: Augmented Dickey-Fuller unit root tests

Appendix B: Stability tests

Appendix C: Normality and linearity tests

Appendix D: Alternative ordering

Appendix E: Alternative elasticities

twp06-08.pdf (487 KB) pp. 1–36

List of Tables

List of Figures

List of Appendix Tables and Figures

Acknowledgements

We would like to thank Bob Buckle, Dasha Leonova, Renee Fry, Kam Szeto, and participants at a Workshop on Public Finance: Fiscal Indicators, Perugia (hosted by the Banca d‘Italia, 30 March-1 April 2006) for useful comments and suggestions.

Disclaimer

This document was commissioned by the New Zealand Treasury. However, the views, opinions, findings and conclusions or recommendations expressed in it are strictly those of the author(s), do not necessarily represent and should not be reported as those of the New Zealand Treasury. The New Zealand Treasury takes no responsibility for any errors, omissions in, or for the correctness of, the information contained in this paper.

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Publication Details

An empirical investigation of fiscal policy in New Zealand

Abstract

Contents

Abstract

Table of Contents

List of Tables

List of Figures

List of Appendix Tables and Figures

1 Introduction

2 Model and data

3 Effects of fiscal policy

4 Sensitivity analysis

5 Contributions of fiscal policy to New Zealand business cycles

6 Conclusions

References

Appendix A: Augmented Dickey-Fuller unit root tests

Appendix B: Stability tests

Appendix C: Normality and linearity tests

Appendix D: Alternative ordering

Appendix E: Alternative elasticities

List of Tables

List of Figures

List of Appendix Tables and Figures

Acknowledgements

Disclaimer