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Structural fiscal balances of the UK: a state-space DSGE approach

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  • Kai Liu

Abstract

This article proposes a new framework to estimate and analyse structural fiscal balances of the UK, by combining the state-space modelling with the Bayesian DSGE modelling. In this way, trends and cycles of aggregate variables can be extracted from data consistently with the macroeconomic theory. A setting of an integrated random walk for the underlying stochastic trends fits the data best. An expansion in government spending can increase nominal fiscal revenue to a certain degree, but the effect is not persistent due to two kinds of crowd-out effects: it crowds out domestic investment; and it pushes up the price of domestic goods and simultaneously crowds out the foreign demand. The shocks to the nominal interest rate, foreign output and the government spending are the three major contributors to the variation of the fiscal revenue cycle.

Suggested Citation

  • Kai Liu, 2016. "Structural fiscal balances of the UK: a state-space DSGE approach," Applied Economics, Taylor & Francis Journals, vol. 48(46), pages 4447-4461, October.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:46:p:4447-4461
    DOI: 10.1080/00036846.2016.1158921
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    References listed on IDEAS

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    1. Durbin, James & Koopman, Siem Jan, 2012. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, edition 2, number 9780199641178.
    2. Bhattarai, Keshab & Trzeciakiewicz, Dawid, 2017. "Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis," Economic Modelling, Elsevier, vol. 61(C), pages 321-338.
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