Fiscal policy dynamics under a consolidation constraint: evidence from a sign-restricted SVAR with orthogonalized business cycle and monetary policy for Australia

In this study, I employ a SVAR method that filters out the business cycle and monetary policy to produce conservative but realistic estimates of fiscal responses and multipliers for Australia that are unavailable in the literature. The expenditure and tax multipliers reach a maximum of 0.73 and 0.54...

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Published inApplied economics Vol. 53; no. 34; pp. 3992 - 4016
Main Author Inchauspe, Julian
Format Journal Article
LanguageEnglish
Published London Routledge 21.07.2021
Taylor & Francis Ltd
Subjects
Business cycles
C32
COVID-19
Economic activity
Economic analysis
Economic theory
Expenditures
fiscal Consolidation
Fiscal policy
Monetary policy
multiplier
Policy making
sign-restricted SVAR
Stimulus
Taxation
Australia
Online AccessGet full text
ISSN0003-6846
1466-4283
DOI10.1080/00036846.2021.1893894

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Abstract In this study, I employ a SVAR method that filters out the business cycle and monetary policy to produce conservative but realistic estimates of fiscal responses and multipliers for Australia that are unavailable in the literature. The expenditure and tax multipliers reach a maximum of 0.73 and 0.54, respectively, but their comparison alternates depending on the time horizon. Using a linear combination of fiscal shocks, I construct conjectural variations to analyse the data dynamics and inform policymaking on ways of restoring economic activity post-Covid-19. Importantly, it is demonstrated that a policy that simultaneously increases expenditure and taxes can serve as both a fiscal stimulus and a debt reduction instrument in the medium run, with dynamics subject to a transitory reverse overshooting. This finding is particularly relevant for policymakers that are adverse to increasing public debt with discretionary fiscal measures.
AbstractList In this study, I employ a SVAR method that filters out the business cycle and monetary policy to produce conservative but realistic estimates of fiscal responses and multipliers for Australia that are unavailable in the literature. The expenditure and tax multipliers reach a maximum of 0.73 and 0.54, respectively, but their comparison alternates depending on the time horizon. Using a linear combination of fiscal shocks, I construct conjectural variations to analyse the data dynamics and inform policymaking on ways of restoring economic activity post-Covid-19. Importantly, it is demonstrated that a policy that simultaneously increases expenditure and taxes can serve as both a fiscal stimulus and a debt reduction instrument in the medium run, with dynamics subject to a transitory reverse overshooting. This finding is particularly relevant for policymakers that are adverse to increasing public debt with discretionary fiscal measures.
Author Inchauspe, Julian
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  organization: Curtin University
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Snippet In this study, I employ a SVAR method that filters out the business cycle and monetary policy to produce conservative but realistic estimates of fiscal...
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SubjectTerms Business cycles
C32
COVID-19
Economic activity
Economic analysis
Economic theory
Expenditures
fiscal Consolidation
Fiscal policy
Monetary policy
multiplier
Policy making
sign-restricted SVAR
Stimulus
Taxation
Title Fiscal policy dynamics under a consolidation constraint: evidence from a sign-restricted SVAR with orthogonalized business cycle and monetary policy for Australia
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