The Macroeconomic Effects of Government Spending Shocks in New Zealand (WP 21/02)

Abstract

This paper estimates the macroeconomic effects of government spending shocks in New Zealand. Using a structural vector autoregression (SVAR) model, I find small output multipliers for government consumption but large multipliers for government investment. Importantly, the real exchange rate appreciates after positive government spending shocks, consistent with classic theory. Private consumption and private investment decrease after government consumption shocks, but increase after government investment shocks. I show that selecting the appropriate series for government investment is important to estimating its effects.

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.

Acknowledgements

The author would like to thank Alfred Haug, Eul Noh, and many colleagues within Treasury, including Anna Hamer-Adams, Andrew Binning, Angus Hawkins, Oscar Parkyn, Ashley Lienert and others, for their great comments that have improved this work. Peter Gardiner in particular has been very important in allowing this work to occur.