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Open AccessArticle

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

Faculty of Economics and Finance, Effat University, Jeddah 22332, Saudi Arabia
Economies 2019, 7(2), 57; https://doi.org/10.3390/economies7020057
Received: 5 May 2019 / Revised: 3 June 2019 / Accepted: 13 June 2019 / Published: 17 June 2019
(This article belongs to the Special Issue Computational Macroeconomics)
This paper investigates the impact of fiscal policy on private consumption and labor supply in the UK economy using time-varying parameter vector autoregression (TVP-VAR) with stochastic volatility for the period Q2 1987 to Q2 2017. It considers fiscal variables such as government expenditure and net tax revenue and evaluates their impact on private consumption and average hours worked per week. Three sample periods were selected and two approaches were used to identify impulse responses, first taking the average of stochastic volatility over the sample period, and then allowing for sign restrictions based on contemporaneous relationships among the selected variables. The study found a negative wealth effect of public spending on private consumption and a positive effect on hours worked, as people tend to work more hours to maintain the same standard of living. Similarly, a tax shock generates negative effects on consumption but the impact on worked hours remains unclear over a three-year time horizon. These findings are almost consistent across sample periods and alternative specifications of impulse responses. This is one of only a few studies to determine the linkages between fiscal policy and the labor market using a macroeconomic framework. View Full-Text
Keywords: fiscal policy; private consumption; labor market; time-varying parameters fiscal policy; private consumption; labor market; time-varying parameters
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Shaheen, R. Impact of Fiscal Policy on Consumption and Labor Supply under a Time-Varying Structural VAR Model. Economies 2019, 7, 57.

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