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Abstract

This thesis studies implications of using the expedniture side of fiscal policy using recent advances in macroeconomic and macroeconometric modelling, tailered for policy analysis. The first chapter investigates the relationship between government expenditure multipliers and the phase of the business cycle. The second chapter executes an optimal public investment policy analysis and investigates the relationship between monetary policy stance and the size of the public consumption multiplier. The third chapter estimates dependence of public consumption and investment expenditure multipliers on a set of macroeconomic factors in a panel setting.

In the first chapter, we investigate the higher-nonlinearity of the relationship between the size of the government expenditure multiplier and the phase of the business cycle. We relax a common in relevant literature assumption that various recessionary periods have similar quantitative implications on the multiplier size. By focusing on the US during the post-World War II
period, we estimate historical multipliers that vary along the timeline. We
use a time-varying parameter vector autoregression model (TVP-VAR) and prepare the time series using the linear projection method. The first chapter shows that TVP-VAR models can successfully estimate government expenditure multipliers that depend on the business cycle phase. We conclude that government expenditure multipliers are counter-cyclical before the late 1980s and pro-cyclical afterwards. The potency of the discretionary government expenditure in stimulating output declines after the 1980s due to a decrease in the non-defence public consumption multiplier that is more sensitive to the monetary policy stance.

The second chapter constructs a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model designed to evaluate welfare effects of monetary and public investment policies, as well as to study the relationship between the size of the public consumption multiplier and the formulation of the monetary policy. The optimal policy analysis shows that U.S. historical monetary policy rule did not yield highest possible household welfare. Additionally, we show that an optimised simple public investment rule has only a modest response to past public debt and does not respond to output fluctuations at all. The second part of the analysis seeks to determine the formulation of monetary policy that prompts the highest multiplier values. We show that active inflation targeting and output gap stabilisation policies of the monetary authority diminish the size of public consumption multiplier at all horizons. A short-range of output growth gap targeting policies can effectively increase the multiplier in the long-run.

The third chapter applies the Local Projection method, that controls for the hitherto unnoticed bias and includes government consumption and investment shocks simultaneously, on the sample of 107 emerging and developing economies, making use of the vintage IMF WEO dataset. The necessity to include all the relevant shocks is discussed, concluding that failure to control for relevant policy shocks may result in biased multipliers. Empirical analysis delivers a positive government investment multiplier that is signiificant even five years after the original fiscal injection and a government consumption multiplier that is only significantly negative in the long-term. Additionally, a set of state-dependent multipliers are computed. Economic slack is associated with higher multiplier values, for both unanticipated government consumption and investment. Rising levels of government debt reduce the potency of government investment stimuli and higher openness to trade magnifies negative output implications of government consumption. Larger public capital stock and size of the public sector tend to diminish the effects of government
investment stimulus.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HC Economic History and Conditions
Departments:	Doctoral Theses School of Policy & Global Affairs > Economics School of Policy & Global Affairs > School of Policy & Global Affairs Doctoral Theses

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