6 Conclusion
In this paper, I have presented and estimated a small model of the New Zealand economy. I then ran a number of fiscal consolidation scenarios and used the results to show the sensitivity of the fiscal impact multiplier and the associated cumulative output losses to uncertainty over the model parameters.
The key findings are that uncertainty surrounding the effects of fiscal consolidations on output can be attributed to several model parameters and that a bad outcome is likely to be worse than a good outcome is to be better. I find that, if monetary policy were to be constrained by the zero-lower bound, the estimated fiscal impact multiplier for New Zealand would be broadly consistent with estimates of the fiscal multiplier in a number of other OECD countries in that position.
Overall, the evidence suggests that fiscal policy makers should be sensitive to the prevailing economic environment when determining the fiscal stance and work closely with central banks if the worst outcomes are to be avoided.
