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Expansionary Fiscal Contractions? Evidence from Panel Data

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  • Vincent Hogan

    (University College Dublin)

Abstract

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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File URL: http://www.ucd.ie/economics/research/papers/2003/WP03.03.pdf
File Function: First version, 2003
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200303.

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Length: 21 pages
Date of creation: 23 Jan 2003
Date of revision:
Handle: RePEc:ucn:wpaper:200303

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Web page: http://www.ucd.ie/economics
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Keywords: Consumption; Saving; Fiscal Policy;

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References

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  1. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
  2. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of two Small Euopean Countries," Working Papers 89, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Francesco Giavazzi & Tullio Jappelli & Marco Pagano, 1999. "Searching for Non-Keynesian Effects of Fiscal Policy," CSEF Working Papers 16, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  4. Bertola, Giuseppe & Drazen, Allan, 1991. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," CEPR Discussion Papers 599, C.E.P.R. Discussion Papers.
  5. Giavazzi, Francesco & Pagano, Marco, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," CEPR Discussion Papers 1284, C.E.P.R. Discussion Papers.
  6. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  7. repec:fth:coluec:754 is not listed on IDEAS
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Cited by:
  1. Robert-Paul Berben & Teunis Brosens, 2005. "The Impact of Government Debt on Private Consumption in OECD Countries," DNB Working Papers 045, Netherlands Central Bank, Research Department.
  2. Gabriele Giudice & Alessandro Turrini & Jan in’t Veld, 2007. "Non-Keynesian Fiscal Adjustments? A Close Look at Expansionary Fiscal Consolidations in the EU," Open Economies Review, Springer, vol. 18(5), pages 613-630, November.
  3. Maria Gabriella Briotti, 2005. "Economic reactions to public finance consolidation - a survey of the literature," Occasional Paper Series 38, European Central Bank.
  4. Berben, Robert-Paul & Brosens, Teunis, 2007. "The impact of government debt on private consumption in OECD countries," Economics Letters, Elsevier, vol. 94(2), pages 220-225, February.
  5. Niamh Hardiman, 2013. "Rethinking the political economy of fiscal consolidation in two recessions in Ireland," Working Papers 201316, Geary Institute, University College Dublin.

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