The macroeconomic effects of fiscal policy

This thesis analyses the macroeconomic eff�ects of changes in �fiscal policy. Chapter 1 provides an overview. Chapter 2 estimates the macroeconomic e�ffects of tax changes in the United Kingdom. Identifi�cation is achieved by constructing an extensive new 'narrative' dataset of 'exogenous' tax changes in the post-war U.K. economy. Using this dataset I fi�nd that a 1 per cent cut in taxes increases GDP by 0.6 per cent on impact and by 2.5 per cent over three years. These �findings are remarkably similar to narrative-based estimates for the United States. Furthermore, 'exogenous' tax changes are shown to have contributed to major episodes in the U.K. post-war business cycle. The long appendix contains the detailed historical narrative and dataset. Chapter 3 estimates the endogenous feedback from output, debt and government spending to fi�scal instruments in the United States. The central innovation is to make direct use of narrative-measured tax shocks in a DSGE model estimated using Bayesian methods. I therefore assume the tax shocks are observable, rather than latent variables. I show that the feedback from debt to the �fiscal instruments is weaker than previously estimated and that the capital tax multiplier is higher. Moreover, the data are more consistent with a model with endogenous feedback than one with an exogenous �fiscal policy speci�fication. Chapter 4 examines the transmission mechanism of government spending shocks by constructing and estimating a DSGE model for the United States. I show that the endogenous response of di�fferent taxes and the strength of wealth eff�ect on labour supply play a powerful role. Given that there is little prior information on the strength of these mechanisms, I estimate the key parameters in the model. I show that this estimated model can match the empirical responses of key variables that are a challenge for many models of this type