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Boosting Confidence: Is there a Role for Fiscal Policy?

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Abstract

This paper investigates the widely held view that expansionary fiscal policy can boost consumer and business confidence, which will stimulate private spending and sustain economic activity. We find evidence in favor of this conjecture, i.e., cuts in direct taxes generate a positive effect on consumer and business confidence, while the same applies in cases of higher non-wage government consumption. However, higher government wage bills and government investment reduce confidence, with the effect being more pronounced when the debt to GDP ratio is high, possibly because they entail a permanent increase in the size of the public sector, which would have to be financed by higher future taxes.

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Bibliographic Info

Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2011_03.

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Date of creation: Mar 2011
Date of revision: Mar 2011
Handle: RePEc:mcd:mcddps:2011_03

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Web page: http://www.uom.gr/index.php?tmima=3

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Keywords: Fiscal Policy; Consumer Confidence; Business Confidence; Fiscal Stimulus of Confidence.;

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  2. Philippe Aghion & David Hemous & Enisse Kharroubi, 2009. "Credit Constraints, Cyclical Fiscal Policy and Industry Growth," NBER Working Papers 15119, National Bureau of Economic Research, Inc.
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  8. Karel Mertens & Morten Ravn, 2010. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks," NBER Working Papers 16289, National Bureau of Economic Research, Inc.
  9. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers 3933, C.E.P.R. Discussion Papers.
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  12. Mackiewicz, Michał, 2008. "Determinants of Cyclicality of Fiscal Surpluses in The OECD Countries," MPRA Paper 16034, University Library of Munich, Germany.
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Cited by:
  1. Luca Agnello & Vitor Castro & Ricardo M. Sousa, 2011. "How Does Fiscal Policy React to Wealth Composition and Asset Prices?," GEMF Working Papers 2011-18, GEMF - Faculdade de Economia, Universidade de Coimbra.
  2. Panayiotis P. Athanasoglou & Ioannis Daniilidis, 2011. "Procyclicality in the banking industry: causes, consequences and response," Working Papers 139, Bank of Greece.
  3. Athanasios O. Tagkalakis, 2013. "Discretionary fiscal policy and economic activity in Greece," Working Papers 169, Bank of Greece.

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