Time-Varying Fiscal Spending Multipliers in the UK
52 Pages Posted: 3 Oct 2017 Last revised: 22 Mar 2018
Date Written: September 1, 2017
We study fiscal spending multipliers of the UK economy using a time-varying parameter factor augmented vector autoregressive (TVP-FAVAR) model. We show that government spending multipliers vary over time and that most of the variation is cyclical: multipliers are typically above one in recessions and below one in expansions. Regarding the drivers of the cyclical variations, our results are consistent with theories emphasizing the role of financial frictions and economic slack. We find no evidence that multipliers are larger at the zero lower bound. Structural factors seem to play a lesser role and multipliers do not exhibit a clear tread. We conclude that policy recommendations based on average multipliers that do not take into account the position of the economy in the cycle are potentially misleading and that the impact of government spending shocks is rather limited in the UK in non-recessionary periods.
Keywords: Government spending shocks, Fiscal transmission mechanism, Time-varying parameter models, Business cycle
JEL Classification: C32, E62, H30, H50
Suggested Citation: Suggested Citation