INDEPENDENT NEWS

New Papers On Government Consumption Multipliers, Automatic Stabilisers And Economic Shocks

Published: Tue 30 Apr 2024 08:12 PM
The Treasury has published today three new papers covering government consumption multipliers, automatic stabilisers and the impacts of global shocks on New Zealand’s economy.
- Andrew Binning, Calculating Government Consumption Multipliers in New Zealand Using an Estimated DSGE Model (WP 24/01). Understanding the impact of discretionary fiscal policy is key to designing and implementing fiscal policy in future recessions. The effectiveness of discretionary fiscal policy is typically measured by fiscal multipliers that measure the dollar change in gross domestic product (GDP) for a dollar change in government spending or tax revenue. This paper calculates government consumption multipliers for New Zealand using an estimated small open economy monetary-fiscal dynamic stochastic general equilibrium (DSGE) model. The results indicate that fiscal multipliers are likely to be larger in economies with weaker stabilisation properties, and further highlight the tensions and trade-offs between enhancing discretionary fiscal policy at the expense of macroeconomic stabilisation policy. It is important to appreciate that large government consumption multipliers are a means to an end and not an end in themselves.
- Andrew Binning, Quantifying the Role Automatic Stabilisers Play in New Zealand Using a Macro-Simulation Approach (WP 24/02). Automatic stabilisers are fiscal policy’s first line of defence in the face of adverse economic shocks. Automatic stabilisers capture fiscal policy’s automatic countercyclical response to the state of the business cycle and are determined by factors like the progressivity of the tax system, the size of government and the amount of benefit spending that is dependent on recipient’s economic circumstances. This paper investigates the role automatic stabilisers play in stabilising the New Zealand economy across the business cycle. It benchmarks current automatic stabilisation policy against different definitions of neutral fiscal policy to determine their contribution to stabilising the economy. Results indicate the standard deviation of GDP could be up to 29% higher in a world without automatic stabilisers. Plausible gains from strengthening automatic stabilisers from current settings are likely to be much smaller. Automatic stabilisers play a larger role when monetary policy is constrained by the lower bound on interest rates or the monetary policy response to inflation and output is weak.
- Susie McKenzie, How vulnerable is New Zealand to economic shocks in its major trading partners? (AN 24/04). This paper estimates a Structural Vector Autoregressive (SVAR) model to investigate the impacts of global shocks on four key New Zealand macroeconomic variables: gross domestic product (GDP), interest rates, the consumer price index (CPI), and the exchange rate, and also reports the forecast error variance decomposition. The model is used to assess New Zealand’s vulnerability to cyclical shocks in its major trading partners: China, the United States, and Australia. Results show that New Zealand’s GDP responds positively to positive GDP shocks from China and the world block, with effects that feed through the economy having an impact on price levels, interest rates and exchange rates. New Zealand’s CPI responds differently to shocks depending on the country of origin, and interest rates respond strongly to most foreign interest rate and foreign GDP shocks with persistent effects. The impact of most foreign shocks on New Zealand’s exchange rate cannot be accurately determined in the model developed in this paper. The analysis shows some of the risks New Zealand faces if it concentrates its trade too heavily on a small number of key economies and provides a useful lens for thinking about the macroeconomic relationships between New Zealand and the rest of the world.
Disclaimer: The views, opinions, findings, and conclusions or recommendations expressed in these papers are strictly those of the authors. 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 papers and articles.

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