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The Effects of Fiscal Policy on Consumption in Good and Bad Times

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  • Hristov, Atanas

Abstract

I examine the effects of fiscal policy actions on private consumption in a yearly panel of sixteen OECD countries conditional on the phase of the business cycle and the state of the public finances. I demonstrate that binding liquidity constraints on households can alter the efficacy of the policy changes in the four regimes—defined by the conditioning states—with expansionary fiscal policy boosting consumption in recessions, having a nil effect on it in normal times or in fiscal stress, and strongly displacing consumption in mixed states when recession and fiscal stress coincide. This happens because the liquidity constrained households consume the additional income generated by an expansionary fiscal policy in recession, and save it in normal times or in fiscal stress when liquidity constraints are not binding. If recession and fiscal stress coincide, fiscal action have an extra distortionary effect on income, and consequently on consumption.

Suggested Citation

  • Hristov, Atanas, 2013. "The Effects of Fiscal Policy on Consumption in Good and Bad Times," MPRA Paper 44658, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:44658
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    File URL: https://mpra.ub.uni-muenchen.de/44658/1/MPRA_paper_44658.pdf
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    References listed on IDEAS

    as
    1. Roberto Perotti, 1999. "Fiscal Policy in Good Times and Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1399-1436.
    2. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters,in: Fiscal Policy after the Financial Crisis, pages 63-98 National Bureau of Economic Research, Inc.
    3. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
    4. Anja Baum & Marcos Poplawski-Ribeiro & Anke Weber, 2012. "Fiscal Multipliers and the State of the Economy," IMF Working Papers 12/286, International Monetary Fund.
    5. Tagkalakis, Athanasios, 2008. "The effects of fiscal policy on consumption in recessions and expansions," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1486-1508, June.
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    Cited by:

    1. Berg Tim Oliver, 2015. "Time Varying Fiscal Multipliers in Germany," Review of Economics, De Gruyter, vol. 66(1), pages 13-46, April.

    More about this item

    Keywords

    Fiscal policy; Consumption; Public Deficit; Debt; Liquidity constraints;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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