This paper studies the real effects of an exogenous UK tax change in recessions and expansions. The tax shock is … regressions (Granger and Teräsvirta, 1994), tax policy shock is found to affect UK macroeconomic variables depending on the phase … of the business cycle the economy is when tax shock occurs. An exogenous tax cut in recessions triggers a large …

policy shocks. We find that controlling for the business cycle shock is important, but controlling for the monetary policy … shock is not, that government spending shocks crowd out both residential and non-residential investment but do not reduce …