ON THE LONG‐TERM EFFECTS OF FISCAL POLICY IN THE UNITED KINGDOM: THE CASE FOR A GOLDEN RULE

Abstract

ABSTRACT This paper uses the SVAR methodology to investigate the effects of public investment on GDP and, more specifically, the effects of the introduction of a golden rule of public finance. We extend the existing literature by estimating a model for the British economy that takes into account long‐run factors such as public debt accumulation and policy interactions. We find that in such a long‐run framework, public investment has a significant and permanently positive effect on GDP; this result runs counter to the most recent literature on the topic using SVAR, which was limited to a short‐run specification. We further find, by comparing different subsamples, that the introduction of the golden rule in 1997 strengthened the positive effect of public investment.