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The 'Expansionary Fiscal Contraction Hypothesis' and Uncertainty About the Permanence of Fiscal Consolidations

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    This paper contrasts the effects of balanced-budget reductions in government consumption on private consumption in the permanent income model and a model allowing for precautionary savings. We compare impulse responses of private consumption to temporary and permanent shocks to government consumption when agents do not observe the shocks directly or can distinguish between temporary and permanent shocks. Our simulations suggest that uncertainty about the permanence of government consumption reductions affect both the impact and the duration of private consumption whereas precautionary saving motives only affect the impact.

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    File URL: http://swopec.hhs.se/lunewp/papers/lunewp2000_002.ps.zip
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    File URL: http://swopec.hhs.se/lunewp/papers/lunewp2000_002.ps
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    File URL: http://swopec.hhs.se/lunewp/papers/lunewp2000_002.pdf.zip
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    File URL: http://swopec.hhs.se/lunewp/papers/lunewp2000_002.pdf
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    Paper provided by Lund University, Department of Economics in its series Working Papers with number 2000:2.

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    Length: 21 pages
    Date of creation: 06 Mar 2000
    Date of revision:
    Handle: RePEc:hhs:lunewp:2000_002
    Contact details of provider: Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
    Phone: +46 +46 222 0000
    Fax: +46 +46 2224613
    Web page: http://www.nek.lu.se/en

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    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Mark Kazarosian, 1997. "Precautionary Savings-A Panel Study," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 241-247, May.
    3. Kimball, Miles S & Mankiw, N Gregory, 1989. "Precautionary Saving and the Timing of Taxes," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 863-79, August.
    4. Caballero, R.J., 1988. "Consumption Puzzles And Precautionary Savings," Discussion Papers 1988_05, Columbia University, Department of Economics.
    5. Giavazzi, Francesco & Pagano, Marco, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," CEPR Discussion Papers 417, C.E.P.R. Discussion Papers.
    6. Malley, James R & Moutos, Thomas, 1996. "Unemployment and Consumption," Oxford Economic Papers, Oxford University Press, vol. 48(4), pages 584-600, October.
    7. 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.
    8. Giavazzi, Francesco & Pagano, Marco, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," CEPR Discussion Papers 1284, C.E.P.R. Discussion Papers.
    9. Campbell, John & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Scholarly Articles 3221494, Harvard University Department of Economics.
    10. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
    11. van der Ploeg, Frederick, 1993. "A Closed-Form Solution for a Model of Precautionary Saving," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 385-95, April.
    12. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries; Composition and Macroeconomic Effects," IMF Working Papers 96/70, International Monetary Fund.
    13. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.
    14. Lusardi, Annamaria, 1998. "On the Importance of the Precautionary Saving Motive," American Economic Review, American Economic Association, vol. 88(2), pages 449-53, May.
    15. Skinner, Jonathan, 1988. "Risky income, life cycle consumption, and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 237-255, September.
    16. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
    17. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-13, December.
    18. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
    19. Barry, Frank & Devereux, Michael B, 1995. "The 'Expansionary Fiscal Contraction' Hypothesis: A Neo-Keynesian Analysis," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 249-64, April.
    20. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
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