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The Effects of Fiscal Policy on Consumption in Good and Bad Times

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  • Hristov, Atanas

Abstract

I examine the effects of fiscal policy actions on private consumption in a yearly panel of sixteen OECD countries conditional on the phase of the business cycle and the state of the public finances. I demonstrate that binding liquidity constraints on households can alter the efficacy of the policy changes in the four regimes—defined by the conditioning states—with expansionary fiscal policy boosting consumption in recessions, having a nil effect on it in normal times or in fiscal stress, and strongly displacing consumption in mixed states when recession and fiscal stress coincide. This happens because the liquidity constrained households consume the additional income generated by an expansionary fiscal policy in recession, and save it in normal times or in fiscal stress when liquidity constraints are not binding. If recession and fiscal stress coincide, fiscal action have an extra distortionary effect on income, and consequently on consumption.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 44658.

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Date of creation: 03 Feb 2013
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Handle: RePEc:pra:mprapa:44658

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Keywords: Fiscal policy; Consumption; Public Deficit; Debt; Liquidity constraints;

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  1. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  2. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98 National Bureau of Economic Research, Inc.
  3. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
  4. Tagkalakis, Athanasios, 2008. "The effects of fiscal policy on consumption in recessions and expansions," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1486-1508, June.
  5. Anja Baum & Marcos Poplawski-Ribeiro & Anke Weber, 2012. "Fiscal Multipliers and the State of the Economy," IMF Working Papers 12/286, International Monetary Fund.
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