We examine the ability of the Expansionary Fiscal Contraction (EFC) hypothesis to explain the performance of of OECD economies during times of crisis. We find some limited evidence in its favour - if public consumption is reduced in response to a fiscal crisis (as defned by a high level of debt), private consumption does seem to increase. However the size of the effect is smaller than that typically found in similar studies. Furthermore, the increase in private consumption is not usually su±cient to offset the direct e®ect of a reduction in the public consumption on output{ fiscal contractions are not literally expansionary.
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Paper provided by School Of Economics, University College Dublin in its series Working Papers with number
200303.
Find related papers by JEL classification: E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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