Investigating the effects of fiscal policy in the UK under the zero lower bound on nominal interest rates

Yao, Yao 2020. Investigating the effects of fiscal policy in the UK under the zero lower bound on nominal interest rates. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

This thesis investigates the effects of the UK post-crisis fiscal policy while the nominal interest rate hits the zero bound. With a limited ability to use conventional monetary policy to support the economy, fiscal policy gets more attention as the alternative to bring the economy back to normal. To evaluate the effectiveness and implications of the fiscal policy during the financial crisis, this thesis introduces a New Keynesian dynamic stochastic general equilibrium (DSGE) model with an explicit government sector and monetary policy governed by a Taylor rule with interest rate constrained by the zero lower bound. The simple New Keynesian framework without the presence of the financial frictions serves as the baseline model. The model is then extended to include financial frictions since the financial crisis of 2008 revealed the imperfection of financial markets. The model is estimated on filtered data for the period from 1989Q2 to 2017Q2 using the Bayesian estimation to find that fiscal policy is more effective under the zero lower bound. The extended version is then estimated and tested against the same period’s unfiltered data using the Indirect Inference method. The estimated model shows that financial frictions work to amplify the effects of fiscal policy. Facing with the liquidity trap, fiscal stimulus could help the economy to escape the zero lower bound and improve social welfare. However, the UK government did not utilise enough of these fiscal policy and thus there was almost no recovery done by the fiscal policies. The fiscal policy had the scope to help the economy recover.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Business (Including Economics)
Uncontrolled Keywords:	New Keynesian, Real Business Cycle, DSGE, Fiscal policy, Zero Lower Bound
Date of First Compliant Deposit:	27 April 2021
Date of Acceptance:	23 April 2021
Last Modified:	27 Apr 2022 01:30
URI:	https://orca.cardiff.ac.uk/id/eprint/140764

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