Hysteresis and Fiscal Policy in Australia

Abstract

This thesis explores the relative welfare, output and employment benefits of alternative forms of fiscal stimulus including public investment, consumption, transfer payments, and wage subsidy schemes. I focus in particular on evaluating two key elements of the Australian Government's fiscal policy response to the Global Financial Crisis (GFC) and COVID-19 pandemic, the Building the Education Revolution (BER) and JobKeeper Payment schemes, from both an empirical and theoretical perspective. The empirical techniques derive from those associated with the credibility revolution in applied microeconomics (Angrist and Pischke, 2009) and the emerging literature regarding geographic cross-sectional fiscal multipliers (Chodorow-Reich, 2019). Empirical analysis utilises never-before-used administrative datasets, novel geocoded datasets, and linked population data for payroll jobs and wages to estimate employment and output multipliers associated with these programs, and their relative cost effectiveness as stimulus or economic security measures. I also derive, estimate and simulate a range of contemporary business cycle models featuring liquidity constrained workers and `learning-by-doing' in production to provide a structural account of the empirical results observed, and to provide new insights into the conduct of fiscal and monetary policy. To this end, this thesis argues that heterogeneous households and hysteresis effects are important for evaluating the efficacy of fiscal policy in small open economies such as Australia. Show more