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Consumer sentiment and countercyclical fiscal policies

  • Frank Westerhoff
  • Martin Hohnisch

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.

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Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 24 (2010)
Issue (Month): 5 ()
Pages: 609-618

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Handle: RePEc:taf:irapec:v:24:y:2010:i:5:p:609-618
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  1. repec:tpr:qjecon:v:108:y:1993:i:1:p:137-56 is not listed on IDEAS
  2. 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.
  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. John Foster & Burkhard Flieth, 2002. "Interactive expectations," Journal of Evolutionary Economics, Springer, vol. 12(4), pages 375-395.
  5. Frank Westerhoff & Martin Hohnisch, 2007. "A note on interactions-driven business cycles," Journal of Economic Interaction and Coordination, Springer, vol. 2(1), pages 85-91, June.
  6. 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.
  7. Simone Alfarano & Thomas Lux & Friedrich Wagner, 2005. "Estimation of Agent-Based Models: The Case of an Asymmetric Herding Model," Computational Economics, Society for Computational Economics, vol. 26(1), pages 19-49, August.
  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.
  9. Frank H. Westerhoff, 2005. "Consumer Behavior And Fluctuations In Economic Activity," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 209-215.
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