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Consumer sentiment and countercyclical fiscal policies

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  • Frank Westerhoff
  • Martin Hohnisch

Abstract

We re-explore the consequences of some popular countercyclical intervention rules in a simple Keynesian-type macroeconomic model in which the dynamics of consumer sentiment and business cycles are intertwined. We find that fiscal policy does not only have a direct effect on national income via the well-known Keynesian multiplier process but also an indirect effect by affecting consumer sentiment. The good news is that the indirect effect may amplify the direct effect and therefore increases a policy-maker's impact on national income. However, the bad news is that due to the interactions between the business cycle and the evolution of consumer sentiment, the stabilization of national income is an intricate matter.

Suggested Citation

  • Frank Westerhoff & Martin Hohnisch, 2010. "Consumer sentiment and countercyclical fiscal policies," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(5), pages 609-618.
  • Handle: RePEc:taf:irapec:v:24:y:2010:i:5:p:609-618
    DOI: 10.1080/02692170903426088
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    References listed on IDEAS

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    1. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, vol. 84(5), pages 1397-1408, December.
    2. Frank Westerhoff & Martin Hohnisch, 2007. "A note on interactions-driven business cycles," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 2(1), pages 85-91, June.
    3. Hohnisch, Martin & Pittnauer, Sabine & Solomon, Sorin & Stauffer, Dietrich, 2005. "Socioeconomic interaction and swings in business confidence indicators," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 345(3), pages 646-656.
    4. Simone Alfarano & Thomas Lux & Friedrich Wagner, 2005. "Estimation of Agent-Based Models: The Case of an Asymmetric Herding Model," Computational Economics, Springer;Society for Computational Economics, vol. 26(1), pages 19-49, August.
    5. John Foster & Burkhard Flieth, 2002. "Interactive expectations," Journal of Evolutionary Economics, Springer, vol. 12(4), pages 375-395.
    6. Alan Kirman, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 137-156.
    7. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 39-72, February.
    8. Hohnisch, Martin & Westerhoff, Frank, 2008. "Business cycle synchronization in a simple Keynesian macro-model with socially transmitted economic sentiment and international sentiment spill-over," Structural Change and Economic Dynamics, Elsevier, vol. 19(3), pages 249-259, September.
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    Cited by:

    1. Westerhoff, Frank & Franke, Reiner, 2012. "Agent-based models for economic policy design: Two illustrative examples," BERG Working Paper Series 88, Bamberg University, Bamberg Economic Research Group.
    2. Franke Reiner, 2012. "Microfounded Animal Spirits in the New Macroeconomic Consensus," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-41, October.
    3. Francisca Guedes de Oliveira & Leonardo Costa, 2013. "The Vat Laffer Curve And The Business Cycle," Working Papers de Economia (Economics Working Papers) 02, Católica Porto Business School, Universidade Católica Portuguesa.
    4. Frank Westerhoff & Martin Hohnisch, 2007. "A note on interactions-driven business cycles," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 2(1), pages 85-91, June.

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