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Expansionary Fiscal Contractions? Evidence from Panel Data

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  • Vincent Hogan

Abstract

We examine the ability of the expansionary fiscal contraction (EFC) hypothesis to explain the performance of OECD economies during fiscal crises. We find some limited evidence in its favour: if public consumption is reduced in response to a fiscal crisis (as defined 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 other studies. Furthermore, the increase in private consumption is usually not sufficient to offset the direct effect of a reduction in public consumption on output—fiscal contractions are not literally expansionary.

Suggested Citation

  • Vincent Hogan, 2004. "Expansionary Fiscal Contractions? Evidence from Panel Data," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 647-659, December.
    • Handle: RePEc:bla:scandj:v:106:y:2004:i:4:p:647-659
    DOI: 10.1111/j.0347-0520.2004.00381.x
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    Cited by:

    1. Niamh Hardiman, 2013. "Rethinking the political economy of fiscal consolidation in two recessions in Ireland," Working Papers 201316, Geary Institute, University College Dublin.
    2. El-Shagi, Makram & Schweinitz, Gregor von, 2021. "Fiscal policy and fiscal fragility: Empirical evidence from the OECD," Journal of International Money and Finance, Elsevier, vol. 115(C).
    3. Vitor Carvalho & Manuel M. F. Martins, 2011. "Investment and output effects of fiscal consolidations in a new-Keynesian DSGE model for the Euro Area: composition matters?," EcoMod2011 3246, EcoMod.
    4. Ioannis Kostakis, 2017. "The impact of shadow economy and/or corruption on private consumption: further evidence from selected Eurozone economies," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 7(3), pages 411-434, December.
    5. 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.
    6. Thibault Lemaire, 2020. "Fiscal Consolidations and Informality in Latin America and the Caribbean," Post-Print halshs-02492309, HAL.
    7. Maria Gabriella Briotti, 2005. "Economic reactions to public finance consolidation - a survey of the literature," Occasional Paper Series 38, European Central Bank.
    8. Ahmed Waqar Qasim & M. Ali Kemal & Omer Siddique, 2015. "Fiscal Consolidation and Economic Growth: A Case Study of Pakistan," PIDE-Working Papers 2015:124, Pakistan Institute of Development Economics.
    9. Guo, Yue Mei & Shi, Yun Rui, 2021. "Impact of the VAT reduction policy on local fiscal pressure in China in light of the COVID-19 pandemic: A measurement based on a computable general equilibrium model," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 253-264.
    10. Vitor M. Carvalho & Manuel M. F. Martins, 2011. "Macroeconomic effects of fiscal consolidations in a DSGE model for the Euro Area: does composition matter?," FEP Working Papers 421, Universidade do Porto, Faculdade de Economia do Porto.
    11. 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.
    12. Valerie Lankester-Campos & Kerry Loaiza-Marín, 2020. "Dynamic Fiscal Multipliers for a Small and Open Economy," Documentos de Trabajo 2004, Banco Central de Costa Rica.

    More about this item

    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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