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Estimating the effects of fiscal policy under the budget constraint

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  • Claeys Peter

Abstract

I reconsider the short-term effects of fiscal policy when both government spending and taxes are allowed to respond to the level of public debt. I embed the long-term government budget constraint in a VAR, and apply this common trends model to US quarterly data. The main finding is that fiscal consolidation has expansionary effects on output and inflation. Non-Keynesian effects also dominate when debt expands. The expectation of policy adjustments to guarantee fiscal sustainability by future tax rises or spending cuts contracts output today.

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Paper provided by Department of Communication, University of Teramo in its series wp.comunite with number 0038.

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Date of creation: Feb 2008
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Handle: RePEc:ter:wpaper:0038

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Keywords: Fiscal policy; sustainability; spending; taxes; common trends; SVAR;

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  2. Juan Luis Jiménez & Jordi Perdiguero & Ancor Suárez, 2011. "Debating as a classroom tool for adapting learning outcomes to the European higher education area," IREA Working Papers 201109, University of Barcelona, Research Institute of Applied Economics, revised Jun 2011.

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