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Effects of fiscal policy on private consumption: evidence from structural-balance fiscal rule deviations

Author

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  • Juan A. Correa
  • Christian Ferrada
  • Pablo Gutiérrez
  • Francisco Parro

Abstract

We use a new narrative measure of fiscal shocks to study how private consumption reacts to government spending increases. Our fiscal shocks arise from three announcements of expansionary fiscal rule deviations in a small and open economy where fiscal policy follows a structural-balance fiscal rule. All those deviations were announced to be mainly on the spending side. We find a negative response of private consumption in the face of those announcements. Our findings are consistent with the existence of consumers expecting some irreversibility in government spending increases and, as a consequence, a rise in future taxes to make the newly announced fiscal spending path consistent with the intertemporal government budget constraint.

Suggested Citation

  • Juan A. Correa & Christian Ferrada & Pablo Gutiérrez & Francisco Parro, 2014. "Effects of fiscal policy on private consumption: evidence from structural-balance fiscal rule deviations," Applied Economics Letters, Taylor & Francis Journals, vol. 21(11), pages 776-781, July.
  • Handle: RePEc:taf:apeclt:v:21:y:2014:i:11:p:776-781
    DOI: 10.1080/13504851.2014.889796
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    References listed on IDEAS

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