MODELLING STATE-CONTINGENT FISCAL RULES IN THE UNITED KINGDOM

Jamie Rush

National Institute Economic Review, 2020, vol. 254, R41-R53

Abstract: I assess a novel rule that was introduced in the UK in 2015. It gave the British government fiscal flexibility whenever GDP growth warranted it. This rule lasted just a year, but it had features worth exploring. I apply solution methods for models with occasionally-binding constraints to assess the demand stabilisation properties of state-contingent fiscal rules. First it is shown that fiscal flexibility can make recessions shallower. Second, it is suggested that GDP growth, rather than measures of the output gap, is a better indicator for triggering fiscal flexibility.

Date: 2020
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