Fiscal expansion, interest rate risk premia, and wage reactions: Some illustrative simulations with NBNZ-DEMONZ

Authors

  • Viv Hall
  • David Rae

Keywords:

Fiscal Policy, Monetary Policy, Interest Rate Risk Premium, Forward-looking Reaction Functions, New Zealand Macroeconometric Modelling

Abstract

The macroeconomic implications of fiscal expansion in a small open economy are examined using the NBNZ-DEMONZ macroeconometric model. The model has been extended to include an endogenous interest rate risk premium (IRRP), and a forward-looking fiscal policy reaction function. An income tax cuts package shows more damped real GDP and underlying inflation paths than does an expenditure increases equivalent; the postulated IRRP proxying financial market mechanisms can contribute at least as much as the monetary policy reaction function to maintaining price stability; the time period over which the fiscal expansion is implemented is vital to outcomes; and the inflationary and real sector impacts of a personal income tax cut package depend heavily on how the cut is 'shared' between firms and workers.

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Published

1996-01-01

How to Cite

Hall, V., & Rae, D. (1996). Fiscal expansion, interest rate risk premia, and wage reactions: Some illustrative simulations with NBNZ-DEMONZ. School of Management Working Papers, 1–34. Retrieved from https://ojs.victoria.ac.nz/somwp/article/view/7230