Modelling State-Contingent Fiscal Rules in the United Kingdom

Publication date: 4 Nov 2020 | Publication type: National Institute Economic Review | Theme: Macroeconomics | External Author(s): Rush, J | JEL Classification: E62; E63; E37 | Journal: National Institute Economic Review Issue 254 | Publisher: Cambridge University Press

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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. 

Keyword tags: 
linear perturbation
fiscal impact multiplier
monetary policy
fiscal policy macroeconomics

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