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

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  • Bertola, Giuseppe
  • Drazen, Allan

Abstract

The authors propose and solve an optimizing model that explains counterintuitive effects of fiscal policy in terms of expectations. If government spending follows an upward-trending stochastic process that the public believes may fall sharply when it reaches specific "trigger" points, then optimizing consumption behavior and simple budget-constraint arithmetic imply a nonlinear relationship between private consumption and government spending. Th is theoretical relation is consistent with the experience of several countries. Copyright 1993 by American Economic Association.

Suggested Citation

  • Bertola, Giuseppe & Drazen, Allan, 1993. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," American Economic Review, American Economic Association, vol. 83(1), pages 11-26, March.
    • Handle: RePEc:aea:aecrev:v:83:y:1993:i:1:p:11-26
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - 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; Modern Monetary Theory

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