The name is absent

interest rate response in this year, but after the year the monetary authorities respond. The
fiscal authorities are assumed to leave tax rates unchanged for the year and then adjust
direct taxes to achieve their budget target. The model is run with forward looking
financial markets, and exchange rates and long rates jump in the first period.¹³¹ These
multipliers are generally below those for discretionary changes in government spending
on goods and services, but these multipliers are also likely to be below 1.0. Barrell et al.
(2004) discuss standard fiscal simulations on NiGEM and suggest reasons why Germany
has the largest multipliers on this table. The average of these three demand shocks is
taken by evaluating the estimation variance of the equations, reflecting the uncertainty in
our understanding of them, and weighting the multipliers by these variances, multiplied
by the shares each has in GDP, and rescaled so that the weights add to one. Hence a
larger component (consumption) may have a more similar weight to a more uncertain
component (investment) than GDP shares would suggest.

Table 7.4 Multiplier Effects of a 1% of GDP Impulse for One Year

Notes: UK in EMU. Interest rates fixed for the first year. No fiscal feedbacks for the first year. The ECB
uses a two-pillar strategy. The exchange rate and the long rate are forward looking. Average uses the
variance of the errors on the structural equations weighted by the share of GDP for the component.

The impact of the shocks on the public finances will depend upon the importance of the
three types of tax we model (direct, indirect and corporate) as well as the significance of
transfers in the economy. We would expect shocks to consumption to have a much more
significant impact on the budget as consumers expenditure is a significant part of the
indirect tax base. However, the significance of indirect taxes varies between countries,
and hence the impacts of the consumption shock also vary. Investment and export shocks
are likely to be less tax rich.

The impact of any shock on the economy affects the Government budget directly and
indirectly through either spending or tax receipts. If the output effect of the shock is small
then the impact on income and corporate tax revenues will be smaller, as will the impact
on transfer payments. Output effects will be smaller the more open the economy and the
more consumption smoothing or rather the smaller are liquidity constraints. The
generosity of transfer payments differs significantly between countries, and is probably
least important in Italy for instance. Hence small open financially liberalised economies
with low multipliers will have lesser effects from shocks onto the budget, and large
countries with generous social security systems will have larger effects. In addition the
impacts of a shock on the budget depend on whether the item being shocked is taxed
heavily. We can see from Table 7.5 that the impacts of consumption shocks on the budget
is markedly higher than investment or export shocks, as we would expect, and in general
export shocks have slightly more budgetary impacts than do investment shocks.

Multipliers are always less than one in these models, and are generally less than those given in
unstructured VAR analyses such as that of Blanchard and Perotti (2002).

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