1 February 2013

MEDIA ADVISORY

Immediate Release

Working Papers published on fiscal policy and benefit flows

The Treasury today published two Working Papers on the effects of fiscal policy and an analysis of benefit flows in New Zealand.

The effects of fiscal policy in New Zealand: Evidence from a VAR model with debt constraints (http://www.treasury.govt.nz/publications/research-policy/wp/2013/13-02)

was written by Oscar Parkyn and Tugrul Vehbi. It examines the dynamic responses of output, inflation and the interest rate to changes in government spending and revenues and analyses the contribution of shocks to New Zealand’s business cycle for the period 1983-2010.

The paper finds that the effects of government expenditure shocks in New Zealand appear to be positive but small in the short-run at the cost of higher interest rates and lower output in the medium to long-run. The sign of the effects of tax policy changes are less clear cut, but again the effects on GDP appear similarly modest. Past fiscal policy is analysed through a historical decomposition of the shocks in the model. This suggests that discretionary fiscal policy has had a generally pro-cyclical impact on GDP over the last fifteen years, and a material impact on the real long-term interest rate. A fiscal expansion has a positive but limited impact on inflation.

An Analysis of Benefit Flows in New Zealand using a Social Accounting Framework (http://www.treasury.govt.nz/publications/research-policy/wp/2013/13-01) was written by Omar Aziz, Nick Carroll and John Creedy. This paper presents and explores the use of a model designed to examine the entrants, exits and transitions of individuals among a wide range of benefit categories in New Zealand. Transition rates and flows are estimated separately for periods before and after the global financial crisis. The model is used to examine, using simulations, the implications for the time profile of changes in the stock of benefit recipients under a range of counterfactual situations.

The views, opinions, findings, and conclusions or recommendations expressed in Treasury Working Papers are strictly those of the authors and do necessarily reflect the views of the Treasury.
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