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Non-linear Effects of Fiscal Policy in Germany: A Markov-Switching Approach

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Author Info
Florian Höppner
Katrin Wesche

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Abstract

Keynesian theory suggests that a reduction in government expenditure has a negative effect on private demand and therefore on output. Contrary, neoclassical theory argues that reduced public expenditure makes room for an expansion of the private sector and thus has a stimulating effect on the economy. Additionally, expectations of a lower tax burden in the future should stimulate consumption. The recent literature discusses that both theories might be right at different times. Especially, during times of fiscal contractions from high levels of debt the economy might react in a neoclassical way. In this paper, we test for non-linear effects of fiscal policy in a Markov-switching approach. We find two different regimes, with a neoclassical regime prevailing around 1972-74, 1979-82 and 1991-93. Furthermore, using time-varying transition probabilities (TVTP) for the Markov process, we test if the neoclassical reaction of private consumption to fiscal variables depends on some!

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Publisher Info
Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse9_2000.

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Length: 25 pages
Date of creation: Jul 2000
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Handle: RePEc:bon:bonedp:bgse9_2000

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Web page: http://www.bgse.uni-bonn.de/index.php?id=494

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Related research
Keywords: fiscal policy; private consumption; Markov-switching; time-varying transition probabilities;

Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  2. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March. [Downloadable!] (restricted)
  3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December. [Downloadable!] (restricted)
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    Other versions:
  5. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries - Composition and Macroeconomic Effects," IMF Working Papers 96/70, International Monetary Fund.
    Other versions:
  6. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [Downloadable!] (restricted)
  7. Karras, Georgios, 1994. "Government Spending and Private Consumption: Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 9-22, February. [Downloadable!] (restricted)
  8. Sutherland, Alan, 1997. "Fiscal crises and aggregate demand: can high public debt reverse the effects of fiscal policy?," Journal of Public Economics, Elsevier, vol. 65(2), pages 147-162, August. [Downloadable!] (restricted)
    Other versions:
  9. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22. [Downloadable!] (restricted)
  10. Giavazzi, Francesco & Pagano, Marco, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," CEPR Discussion Papers 1284, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Francis X. Diebold & Joon-Haeng Lee & Gretchen C. Weinbach, 1993. "Regime switching with time-varying transition probabilities," Working Papers 93-12, Federal Reserve Bank of Philadelphia.
  12. Giavazzi, Francesco & Jappelli, Tullio & Pagano, Marco, 2000. "Searching for Non-Linear Effects of Fiscal Policy: Evidence from Industrial and Developing Countries," CEPR Discussion Papers 2374, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  13. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
  14. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Anton Burger & Martin Zagler, 2008. "US growth and budget consolidation in the 1990s: was there a non-Keynesian effect?," International Economics and Economic Policy, Springer, vol. 5(1), pages 225-235, July. [Downloadable!] (restricted)
  2. Christophe Kamps, 2006. "Are the effects of fiscal policy really nonlinear? A note," Empirica, Springer, vol. 33(2), pages 113-125, June. [Downloadable!] (restricted)
  3. Anton Burger & Martin Zagler, 2007. "Reasons for the U.S. growth period in the nineties: non-keynesian effects, asset wealth and productivity," Department of Economics Working Papers wuwp095, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
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