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The 'German View', Fiscal Consolidation and Consumption Booms: Empirical Evidence from Denmark


  • U. Michael Bergman
  • Michael M. Hutchison


We develop an alternative test of the 'German View' that fiscal contractions may lead to immediate consumption booms derived from a form of an open-economy permanent income model where we add uncertainty over whether shocks are permanent or transitory. Using a time-series statistical methodology, we distinguish between three shifts to "permanent" income - those arising from permanent shifts in government expenditure, terms-of-trade and "other" factors including cost and productivity shocks. We are also able to identify a composite transitory disturbance on consumption, which incorporates short-run aggregate demand considerations and business cycle effects. In our empirical study we find, in accordance with the 'German View', that an anticipated permanent reduction of government expenditure is associated with a strong short-run (and permanent) increase in private consumption. However, the Danish experience following the fiscal contraction in 1982 suggest that this was not a dominant factor behind the consumption boom. Our evidence shows instead that other factors increasing permanent income, including a substantial terms-of-trade improvement, were much more important.

Suggested Citation

  • U. Michael Bergman & Michael M. Hutchison, "undated". "The 'German View', Fiscal Consolidation and Consumption Booms: Empirical Evidence from Denmark," EPRU Working Paper Series 96-10, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:epruwp:96-10

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    References listed on IDEAS

    1. Kala Krishna & Anne Krueger, 1995. "Implementing Free Trade Areas: Rules of Origin and Hidden Protection," NBER Working Papers 4983, National Bureau of Economic Research, Inc.
    2. Lopez, Ramon E. & Rodrik, Dani, 1990. "Trade restrictions with imported intermediate inputs : When does the trade balance improve?," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 329-338, November.
    3. Krueger, Anne O., 1997. "Free trade agreements versus customs unions," Journal of Development Economics, Elsevier, vol. 54(1), pages 169-187, October.
    4. Lopez, Ramon & Panagariya, Arvind, 1992. "On the Theory of Piecemeal Tariff Reform: The Case of Pure Imported Intermediate Inputs," American Economic Review, American Economic Association, vol. 82(3), pages 615-625, June.
    5. Carsten Kowalczyk, 1990. "Welfare and Customs Unions," NBER Working Papers 3476, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Hjelm, Göran & Johansson, Martin W, 2002. "Structural Change in Fiscal Policy and The Permanence of Fiscal Contractions - The Case of Denmark and Ireland," Working Papers 2002:11, Lund University, Department of Economics.
    2. Hjelm, Goran, 2002. " Effects of Fiscal Contractions: The Importance of Preceding Exchange Rate Movements," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 423-441, September.

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