Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience
In earlier work we documented two episodes in which a sharp fiscal consolidation was associated with a surprisingly large expansion in private domestic demand. In this paper we draw on further evidence to investigate if and when fiscal policy changes can have such non-Keynesian effects. In the first part of the paper, we analyse cross-country data for 19 OECD countries. In the second part we concentrate on the Swedish fiscal expansion of the early 1990s. The cross-country evidence on private consumption confirms that fiscal policy changes - both contractions and expansions - can have non-Keynesian effects if they are sufficiently large and persistent. It also suggests that these effects can result not only from changes in public consumption, but to some extent also from changes in taxes and transfers. The latter result is also consistent with the Swedish experience, where a decrease in net taxes (with almost no change in public consumption) was associated with a dramatic fall in private domestic demand. Our evidence and that from other studies agree that during the Swedish fiscal expansion of the early 1990s a large negative error should be interpreted, but it is clear that the most obvious candidates (wealth effects and after-tax real interest rate effects) are not sufficient to explain it. This error may reflect a large downward revision of permanent disposable income, which affected the consumption choices of Swedish households over and beyond the negative effects of the drop in real asset prices. We suggest that this downward revision in permanent disposable income may have been triggered, at least partly, by the fiscal expansion of the early 1990s.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Nov 1995|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Berg, Lennart & Bergstrom, Reinhold, 1995. " Housing and Financial Wealth, Financial Deregulation and Consumption--The Swedish Case," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(3), pages 421-39, September.
- Bertola, Giuseppe & Drazen, Allan, 1991.
"Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity,"
CEPR Discussion Papers
599, C.E.P.R. Discussion Papers.
- Bertola, Giuseppe & Drazen, Allan, 1993. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," American Economic Review, American Economic Association, vol. 83(1), pages 11-26, March.
- Bertola, G. & Drazen, A., 1991. "Trigger Pointsand Budget Cuts ; Explaining the Effects of Fiscal Austerity," Papers 26-91, Tel Aviv.
- Giuseppe Bertola & Allan Drazen, 1991. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," NBER Working Papers 3844, National Bureau of Economic Research, Inc.
- Jappelli, Tullio & Pagano, Marco, 1988.
"Consumption and Capital Market Imperfection: An International Comparison,"
CEPR Discussion Papers
244, C.E.P.R. Discussion Papers.
- Jappelli, Tullio & Pagano, Marco, 1989. "Consumption and Capital Market Imperfections: An International Comparison," American Economic Review, American Economic Association, vol. 79(5), pages 1088-1105, December.
- Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
- Berg, Lennart, 1994. "Household Savings and Debts: The Experience of the Nordic Countries," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 42-53, Summer.
- Agell, J. & Berg, L. & Edin, P.A., 1995.
"Tax Reform, Consumption and Asset Structure,"
1995-17, Uppsala - Working Paper Series.
- Alan Sutherland, .
"Fiscal Crises and Aggregate Demand: Can High Public Debt Reverse the Effects of Fiscal Policy?,"
95/17, Department of Economics, University of York.
- Sutherland, Alan, 1997. "Fiscal crises and aggregate demand: can high public debt reverse the effects of fiscal policy?," Journal of Public Economics, Elsevier, vol. 65(2), pages 147-162, August.
- Sutherland, Alan, 1995. "Fiscal Crises and Aggregate Demand: Can High Public Debt Reverse the Effects of Fiscal Policy?," CEPR Discussion Papers 1246, C.E.P.R. Discussion Papers.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1284. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.