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The Asymmetric Effects of Fiscal Policy on Private Consumption over the Business Cycle

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  • Athanasios TAGKALAKIS

Abstract

This paper explores on a yearly panel of nineteen OECD countries from 1970-2001 the effects of fiscal policy on private consumption in recessions and expansions. In the presence of binding liquidity constraints on households, fiscal policy is more e¤ective in boosting private consumption in recessions than in expansions. The effect is more pronounced in countries characterized by a less developed consumer credit market. This happens because the fraction of individuals that face binding liquidity constraints in a recession will consume the extra income generated following a tax cut or government spending increase.

Suggested Citation

  • Athanasios TAGKALAKIS, 2004. "The Asymmetric Effects of Fiscal Policy on Private Consumption over the Business Cycle," Economics Working Papers ECO2004/19, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2004/19
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    Keywords

    Fiscal policy; Liquidity constraints; Consumption; Recessions;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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