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The Impact of Fiscal Policy on Private Consumption in Israel with Emphasis on the Fiscal Expectations Approach

Author

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  • Yaacov Lavi

    (Bank of Israel)

  • Michel Strawczynski

    (Bank of Israel)

Abstract

In this paper we assess the impact of fiscal policy on private consumption. We find that there is substitution between private and public consumption but that it is of very limited magnitude (approximately 20 percent). It was also found that, in contrast to the Ricardian approach, the method of financing of public expenditure has an effect on private consumption. Thus, an increase in the direct taxation of wages has a negative effect on consumption that is equal to the full amount of the tax increase while bond financing has a positive effect as long the increase in public debt is small.

Suggested Citation

  • Yaacov Lavi & Michel Strawczynski, 2005. "The Impact of Fiscal Policy on Private Consumption in Israel with Emphasis on the Fiscal Expectations Approach," Israel Economic Review, Bank of Israel, vol. 3(1), pages 53-86.
    • Handle: RePEc:boi:isrerv:v:3:y:2005:i:1:p:53-86
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    References listed on IDEAS

    as
    1. 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.
    2. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    3. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246, National Bureau of Economic Research, Inc.
    4. Graham, Fred C, 1993. "Fiscal Policy and Aggregate Demand: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 659-666, June.
    5. Giavazzi, Francesco & Jappelli, Tullio & Pagano, Marco, 2000. "Searching for non-linear effects of fiscal policy: Evidence from industrial and developing countries," European Economic Review, Elsevier, vol. 44(7), pages 1259-1289, June.
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