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Supply-Side Policy and Economic Growth: A Case Study of the UK

Lucy Barros Orcid Logo, David Meenagh

Open Economies Review, Volume: 31, Issue: 1, Pages: 159 - 193

Swansea University Author: Lucy Barros Orcid Logo

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Abstract

This paper investigates the potential for a causal relationship between certain supply-side policies and UK output and productivity growth between 1970 and 2009. We outline an open economy DSGE model of the UK in which productivity growth is determined by the tax and regulatory environment faced by...

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Published in: Open Economies Review
ISSN: 0923-7992 1573-708X
Published: 2020
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa50593
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Abstract: This paper investigates the potential for a causal relationship between certain supply-side policies and UK output and productivity growth between 1970 and 2009. We outline an open economy DSGE model of the UK in which productivity growth is determined by the tax and regulatory environment faced by firms. This model is estimated and tested using simulation-based econometric methods (indirect inference). Using Monte Carlo methods we investigate the power of the test as we apply it, allowing the construction of uncertainty bounds for the structural parameter estimates and hence for the quantitative implications of policy reform in the estimated model. We also test and confirm the model's identification, thus ensuring that the direction of causality is unambiguously from policy to productivity. The results offer robust empirical evidence that temporary changes in policies underpinning the business environment can have sizeable effects on economic growth over the medium term.JEL Codes: E02, O4, O43, O5
Keywords: Taxation, Regulation, Labour Market Regulation, Economic Growth, DSGE, Indirect Inference
Issue: 1
Start Page: 159
End Page: 193