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The Relationship Between Large Fiscal Adjustments And Short-Term Output Growth Under Alternative Fiscal Policy Regimes

  • Stephen M. Miller
  • Frank S. Russek

A small but growing body of literature searches for evidence of non-Keynesian effects of fiscal contractions. That is, some evidence exists that large fiscal contractions stimulate short-run economic activity. This article continues that research effort by systematically examining the effects (if any) of unusual fiscal events-either non-Keynesian results within a Keynesian model or Keynesian results within a neoclassical model-on short-run economic activity. The authors examine this issue within three separate models-a St. Louis equation, a Hall-type consumption equation, and a growth accounting equation. The empirical findings do not provide strong systematic support for the view that unusually large fiscal contractions/expansions reverse the effects of normal fiscal events. Moreover, the authors find only limited evidence that trigger points are empirically important. Copyright 2003 Western Economic Association International.

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Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

Volume (Year): 21 (2003)
Issue (Month): 1 (01)
Pages: 41-58

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Handle: RePEc:bla:coecpo:v:21:y:2003:i:1:p:41-58
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  1. Sutherland, Alan, 1995. "Fiscal Crises and Aggregate Demand: Can High Public Debt Reverse the Effects of Fiscal Policy?," CEPR Discussion Papers 1246, C.E.P.R. Discussion Papers.
  2. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  3. Robert F. Westcott & C. John McDermott, 1996. "An Empirical Analysis of Fiscal Adjustments," IMF Working Papers 96/59, International Monetary Fund.
  4. 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.
  5. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1127-70, November.
  6. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," NBER Working Papers 5730, National Bureau of Economic Research, Inc.
  7. Miller, Stephen M., 1986. "Financial innovation, depository-institution deregulation, and the demand for money," Journal of Macroeconomics, Elsevier, vol. 8(3), pages 279-296.
  8. Stpehen M. Miller & Frank S. Russek, 1993. "Fiscal Structures and Economic Growth: International Evidence," Macroeconomics 9309001, EconWPA, revised 23 Sep 1993.
  9. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
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  12. repec:fth:harver:1435 is not listed on IDEAS
  13. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  14. 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.
  15. Francesco Giavazzi & Marco Pagano, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," NBER Working Papers 5332, National Bureau of Economic Research, Inc.
  16. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  17. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122 National Bureau of Economic Research, Inc.
  18. Miller, Stephen M., 1989. "Money demand instability: has it ended?," Economics Letters, Elsevier, vol. 30(4), pages 345-349, October.
  19. Dallas S. Batten & R. W. Hafer, 1983. "The relative impact of monetary and fiscal actions on economic activity: a cross-country comparison," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 5-12.
  20. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
  21. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  22. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
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