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Fiscal Policy and Private Consumption – Saving Decisions: Evidence from Finland

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Author Info
Brunila, Anne (Bank of Finland Research)
Abstract

The paper presents a theoretical model of private consumption that emcompasses both the conventional (Keynesian) view of fiscal policy and the Ricardian debt neutrality hypothesis. The effects of fiscal policy on private consumption are analyzed in an extended framework built on Blanchard's stochastic model of intertemporal optimization with finitely lived consumers, in which private consumption depends on expected lifetime wealth. The model also nests various hypotheses concerning the relationship between public spending and private consumption. Empirical analysis is based on the Finnish annual data from 1960–1995 and uses the nonlinear instrumental variable GMM estimator. The tests cannot reject the hypothesis that consumers are Ricardian. Moreover, the results suggest that in the consumers' utility functions, government consumption is a substitute for private consumption.

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File URL: http://www.bof.fi/NR/rdonlyres/F1291F0E-EC2D-4DAD-92A3-C6E0177E6536/0/DP_28_1996.pdf
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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 28/1996.

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Length: 43 pages
Date of creation: 18 Dec 1996
Date of revision:
Handle: RePEc:hhs:bofrdp:1996_028

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: private consumption; private saving; fiscal policy; planning horizon;

References listed on IDEAS
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  19. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
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  22. Brunila, Anne & Takala, Kari, 1993. "Private Indebtedness and the Banking Crisis in Finland," Research Discussion Papers 9/1993, Bank of Finland. [Downloadable!]
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  34. Evans, Paul, 1988. "Are Consumers Ricardian? Evidence for the United States," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 983-1004, October. [Downloadable!] (restricted)
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