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Consumption and fiscal policies: medium-run non-Keynesian effects

Author

Listed:
  • Giorgio Rodano

    (Universita' di Roma "La Sapienza")

  • Enrico Saltari

    (Universita' di Urbino)

Abstract

In this paper we study the effects of fiscal policies on current consumption, distinguishing between Keynesian effects (KE), due to changes in current disposable income, and non-Keynesian effects (NE), due to expected changes in future disposable income. The literature has argued that permanent changes in fiscal policies affect current consumption. We show that the size and sign of such NE effects depend crucially on the expected lifetime of the representative consumer and on the timing of policy changes. In particular we investigate the effects on current consumption of medium run changes in fiscal policy. Using a consumption function based on a perpetual youth model, formulated in discrete time, we show the possibility of reversed NE effects where sign (KE) = sign (NE). All that is required for such reversed NE effects is the satisfaction of a simple and realistic condition depending on the expected lifetime of the consumer and the starting date for the offsetting fiscal measures needed to satisfy the intertemporal public sector budget constraint. We propose a number of exercises showing the importance of the level and dynamics of public debt. The results help to explain anomalous trends in consumption during 90s, as Italy prepared to join the EMU.

Suggested Citation

  • Giorgio Rodano & Enrico Saltari, 2001. "Consumption and fiscal policies: medium-run non-Keynesian effects," Temi di discussione (Economic working papers) 426, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_426_01
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2001/2001-0426/tema_426_01.pdf
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    Cited by:

    1. Altissimo, Filippo & Gaiotti, Eugenio & Locarno, Alberto, 2005. "Is money informative? Evidence from a large model used for policy analysis," Economic Modelling, Elsevier, vol. 22(2), pages 285-304, March.

    More about this item

    Keywords

    consumption function; fiscal policy; public debt;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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