Fiscal Policy Effectiveness in the Banking Crisis

Abstract

We investigate the effects of changes in taxes using the National Institute international macro model, NiGEM. A comparison on fiscal impulses worth 1 per cent of GDP for one year is made, with a comparison of a direct tax change, indirect tax change, and a lump sum payment. Multipliers are assessed one country at a time and when policy is coordinated to increase its impacts. We look at the importance of releasing borrowing constraints in a banking crisis. The analysis assumes financial and foreign exchange markets are forward looking.