# Impact of Fiscal Policy on Consumption and Labor Supply under a Time-Varying Structural VAR Model

## Abstract

**:**

## 1. Introduction

## 2. Literature Review

## 3. Methodology

_{t}is an n × 1 vector of observed endogenous variables, C

_{t}is an n × 1 vector of time-varying coefficients that multiply constant terms, B(i,t), i = 1, …, k represents n × n matrices of time-varying coefficients, and μ

_{t}represents heteroscedastic unobservable shocks with n × n time-varying variance covariance matrix Ω

_{t}. To specify the simultaneous relationships of the structural shocks, this model assumes recursive identification through the decomposition of ${\Omega}_{t}={A}_{t}^{-1}{\Sigma}_{t}{\Sigma}_{t}{A}_{t}^{\prime -1}$, where ${A}_{t}$ is a lower triangular matrix with diagonal element equal to 1 and is allowed to vary over time, which implies that an innovation in the ith variable has a time-invariant effect on the jth variable (Nakajima 2011). This recursive structure follows a causal ordering of government expenditures, government revenues, personal consumption expenditures and weekly hours worked. An increase in government expenditures may leads to large tax hikes which in turn reduce personal consumption expenditures. In case, If people want to maintain same standard of living then they may work for more hours. Furthermore, ${\Sigma}_{t}=diag\left({\sigma}_{1t},\dots ,{\sigma}_{nt}\right)$, ${\beta}_{t}$ is defined as the stacked row vector of ${B}_{t},\dots ,{B}_{kt}$, ${\alpha}_{t}$ is the stacked row vector of the free lower-triangular elements of ${A}_{t}$, and ${h}_{t}=\left({h}_{1,t},\dots ,{h}_{n,t}\right)$ where ${h}_{jt}=log{\sigma}_{jt}^{2}$. In addition, the model assumes the time-varying parameters follow a random walk process.

## 4. Results and Discussion

## 5. Conclusions

## Funding

## Conflicts of Interest

## Appendix A. Impulse Responses for Alternative Sample Periods Q3 1996, Q2 2010, and Q1 2015

## Appendix B. Alternative Specification of Priors

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Variable | Description |
---|---|

Government expenditure | Government consumption expenditure, gross fixed capital formation, social payments, other payables Source: Eurostat database |

Net tax revenue | Direct taxes: income tax, wealth tax, corporate tax; indirect taxes: value-added tax (VAT) and taxes on production and imports Source: Eurostat database |

Private consumption | Household final consumption expenditure Source: Office for National Statistics |

Weekly hours worked | Estimates of mean actual hours of work including overtime per week Source: Office for National Statistics |

**Table 2.**Estimation results of time-varying parameter vector autoregression (TVP-VAR) and Markov chain Monte Carlo (MCMC) convergence diagnostics.

Parameter | Mean | Std Dev | 95% Interval | Geweke Convergence Diagnostics | Inefficiency |
---|---|---|---|---|---|

${\Sigma}_{\beta 1}$ | 0.0023 | 0.0003 | (0.0018, 0.0029) | 0.881 | 5.94 |

${\Sigma}_{\beta 2}$ | 0.0023 | 0.0003 | (0.0018, 0.0029) | 0.716 | 7.22 |

${\Sigma}_{a1}$ | 0.0056 | 0.0016 | (0.0033, 0.0094) | 0.657 | 31 |

${\Sigma}_{a2}$ | 0.0056 | 0.0019 | (0.0034, 0.0107) | 0.307 | 43.65 |

${\Sigma}_{h1}$ | 0.0059 | 0.0018 | (0.0034, 0.0102) | 0.924 | 52.48 |

${\Sigma}_{h2}$ | 0.1674 | 0.0458 | (0.0921, 0.2723) | 0.671 | 46.02 |

Variable | Restriction |
---|---|

Private consumption (C) | - |

Average weekly hours worked (W) | + |

Government expenditure (G) | + |

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**MDPI and ACS Style**

Shaheen, R.
Impact of Fiscal Policy on Consumption and Labor Supply under a Time-Varying Structural VAR Model. *Economies* **2019**, *7*, 57.
https://doi.org/10.3390/economies7020057

**AMA Style**

Shaheen R.
Impact of Fiscal Policy on Consumption and Labor Supply under a Time-Varying Structural VAR Model. *Economies*. 2019; 7(2):57.
https://doi.org/10.3390/economies7020057

**Chicago/Turabian Style**

Shaheen, Rozina.
2019. "Impact of Fiscal Policy on Consumption and Labor Supply under a Time-Varying Structural VAR Model" *Economies* 7, no. 2: 57.
https://doi.org/10.3390/economies7020057