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The 'Expansionary Fiscal Contraction' Hypothesis: A Neo-Keynesian Analysis

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  • Barry, Frank
  • Devereux, Michael B

Abstract

It has recently been argued that several fiscal contractions can, through their impact on expectations, lead to growth in consumption, investment, and employment. Since such contractions typically occur because adjustment has been delayed due to fear of aggravating unemployment, the authors examine the hypothesis in a model with wage/price rigidities. The New Classical features of the model, however, allow expectational effects to be taken fully into account. While consumption and investment may rise, the authors find that employment is in all cases likely to fall; this leads them to believe that the so-called 'German view' is overoptimistic. Copyright 1995 by Royal Economic Society.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 47 (1995)
Issue (Month): 2 (April)
Pages: 249-64

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Handle: RePEc:oup:oxecpp:v:47:y:1995:i:2:p:249-64

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Cited by:
  1. Afonso, António, 2007. "An avenue for expansionary fiscal contractions," MPRA Paper 4593, University Library of Munich, Germany.
  2. Jim Malley & Hassan Molana, 2002. "Efficiency Wages, Unemployment and Macroeconomic Policy," Dundee Discussion Papers in Economics 126, Economic Studies, University of Dundee.
  3. Barry, Frank, 2003. "Tax Policy, FDI and the Irish Economic Boom of the 1990s," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 33(2), pages 221-236, September.
  4. Jerome Creel, 1998. "L'assainissement budgétaire au Danemark entre 1983 et 1986 : l'anti-mythe (in French)," Documents de Travail de l'OFCE 1998-02, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. Niamh Hardiman, 2013. "Rethinking the political economy of fiscal consolidation in two recessions in Ireland," Working Papers 201316, Geary Institute, University College Dublin.
  6. António Afonso, 2006. "Expansionary fiscal consolidations in Europe: new evidence," Working Papers Department of Economics 2006/18, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  7. Woon Gyu Choi & Michael B. Devereux, 2005. "Asymmetric Effects of Government Spending," IMF Working Papers 05/7, International Monetary Fund.
  8. António Afonso, 2007. "Expansionary fiscal consolidations in Europe: part of conventional wisdom?," Money Macro and Finance (MMF) Research Group Conference 2006 50, Money Macro and Finance Research Group.
  9. Bergman, Michael, 2000. "The 'Expansionary Fiscal Contraction Hypothesis' and Uncertainty About the Permanence of Fiscal Consolidations," Working Papers 2000:2, Lund University, Department of Economics.
  10. Franck Barry, 2013. "The Knowledge Economy, Economic Transformations and ICT: Regional Dynamics in the Deployment Phase. Case study: Southern and Eastern Ireland," JRC-IPTS Working Papers JRC83549, Institute for Prospective and Technological Studies, Joint Research Centre.
  11. António Afonso, 2001. "Non-Keynesian Effects of Fiscal Policy in the EU-15," Working Papers Department of Economics 2001/07, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  12. Hallett, Andrew Hughes & Jensen, Svend E. Hougaard & Richter, Christian, 2005. "The European economy at the cross roads: Structural reforms, fiscal constraints, and the Lisbon Agenda," Research in International Business and Finance, Elsevier, vol. 19(2), pages 229-250, June.
  13. Gianluigi Giorgioni & Ken Holden, 2003. "Ricardian equivalence, expansionary fiscal contraction and the stock market: a VECM approach," Applied Economics, Taylor & Francis Journals, vol. 35(12), pages 1435-1443.
  14. McCarthy, F. Desmond, 2001. "Social policy and macroeconomics : the Irish experience," Policy Research Working Paper Series 2736, The World Bank.

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