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Fiscal policy and private investment in Greece

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  • Maria Th. Kasselaki
  • Athanasios O. Tagkalakis

Abstract

This paper investigates the effects of fiscal policy on private non-residential investment and output in Greece. Besides examining the direct effects of fiscal consolidation, we investigate the role of financial markets and economic sentiment in the transmission of fiscal policy shocks. A tax based fiscal consolidation has more pronounced and more protracted negative effects on output and private non-residential investment relative to an expenditure based fiscal consolidation. A government spending-based fiscal consolidation improves financial markets and boosts economic sentiment. This in turn mitigates the direct negative effects of fiscal consolidation on private investment and output leading to a more rapid recovery. On the other hand, a tax hike fails to induce this positive confidence effect magnifying the negative effects of fiscal adjustment.

Suggested Citation

  • Maria Th. Kasselaki & Athanasios O. Tagkalakis, 2016. "Fiscal policy and private investment in Greece," International Economics, CEPII research center, issue 147, pages 53-106.
  • Handle: RePEc:cii:cepiie:2016-q3-147-3
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    Cited by:

    1. Andreas Zervas, 2018. "Tax Elasticities and the Macroeconomic Effects of Fiscal Policy in Greece," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 64(1), pages 59-98.
    2. Nektarios Michail & Christos Savva & Demetris Koursaros, 2018. "Effects of fiscal consolidation on business confidence in the Euro Area," Economics and Business Letters, Oviedo University Press, vol. 7(2), pages 76-83.
    3. Yannis Stournaras, 2019. "Lessons from the Greek Crisis: Past, Present, Future," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 47(2), pages 127-135, June.

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    More about this item

    Keywords

    Fiscal consolidation; Investment; Output; Financial markets; Economic sentiment;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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