ON THE LONG‐TERM EFFECTS OF FISCAL POLICY IN THE UNITED KINGDOM: THE CASE FOR A GOLDEN RULE

Jerome Creel, Paola Monperrus‐Veroni and Francesco Saraceno

Scottish Journal of Political Economy, 2009, vol. 56, issue 5, 580-607

Abstract: This paper uses the SVAR methodology to investigate the effects of public investment on GDP and, more specifically, the effects of the introduction of a golden rule of public finance. We extend the existing literature by estimating a model for the British economy that takes into account long‐run factors such as public debt accumulation and policy interactions. We find that in such a long‐run framework, public investment has a significant and permanently positive effect on GDP; this result runs counter to the most recent literature on the topic using SVAR, which was limited to a short‐run specification. We further find, by comparing different subsamples, that the introduction of the golden rule in 1997 strengthened the positive effect of public investment.

Date: 2009
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