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Parameter Uncertainty and the Fiscal Multiplier

Publication Details

  • Parameter Uncertainty and the Fiscal Multiplier
  • Published: 16 Jul 2013
  • Status: Current
  • Author: Murray, Jamie
  • Pages: (2),iii,31
  • ISBN: 978-0-478-40367-1 (Online)
  • Ref. No: WP 13/19
  • Pub. type: Working Papers
  • JEL Classification: E32; E43; E62; F33; F41
 

Parameter Uncertainty and the Fiscal Multiplier

Published 16 Jul 2013

Author: Jamie Murray

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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Contents

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Executive summary

1 Introduction

2 A small model of the New Zealand economy

3 Estimation

4 Fiscal policy simulations

5 Implications for policy and research

6 Conclusion

References

Appendix

twp13-19.pdf (860 KB) pp. (2),i-iv,1-31

Acknowledgements

I am grateful for helpful comments on an earlier draft from Tugrul Vehbi, Stephen Turnovsky, Vassilis Sarantides, Tom Pybus, Steve Nickell, Michael Ryan, Vinnie Nagaraj and participants in the Treasury's Macroeconomic Analysis Committee.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

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