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Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity

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  • Giuseppe Bertola
  • Allan Drazen

Abstract

We propose and solve an optimizing model which explains counterintuitive effects of fiscal policy in terms of expectations. If government spending follows an upward-trending stochastic process which the public believes may fall sharply when it reaches specific "target points," then optimizing consumption behavior and simple budget constraint arithmetic imply a nonlinear relationship between private consumption and government spending. This theoretical relation is consistent with the experience of several countries.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3844.

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Date of creation: Sep 1991
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Publication status: published as American Economic Review, vol. 83, no. 9, pp. 11-26 March 1993
Handle: RePEc:nbr:nberwo:3844

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  1. BCE: bom, mas suficiente?
    by Carlos Eduardo Gonçalves in Economista X on 2014-06-05 14:06:00
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