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Searching for Non-Monotonic Effects of Fiscal Policy: New Evidence

Data revisions and the availability of a longer sample offer the opportunity to reconsider the empirical findings that suggest that in the OECD countries national saving responds non-monotonically to fiscal policy. The paper confirms that the circumstance most likely to give rise to a non-monotonic response of national saving to a fiscal impulse is a “large and persistent impulse”, defined as one in which the full employment surplus, as a percent of potential output, changes by at least 1.5 percentage points per year over a two-year period. This particular circumstance remains the only statistically significant one even when we allow for non-monotonic responses to arise when public debt is growing rapidly or interest rate spreads are widening. We find that non-monotonic responses are similar for fiscal contractions and expansions. In particular, an increase in net taxes has no effect on national saving during large fiscal contractions or expansions. For government consumption there is a large, albeit in some specifications less then complete, offset during expansions or contractions.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 142.

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Date of creation: 01 Sep 2005
Date of revision:
Publication status: Published in Monetary and Economic Studies, October 2005, vol. 23, issue S1
Handle: RePEc:sef:csefwp:142
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  1. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of two Small Euopean Countries," Working Papers 89, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Martin Feldstein, 1980. "Government Deficits and Aggregate Demand," NBER Working Papers 0435, National Bureau of Economic Research, Inc.
  3. Gabriele Giudice & Alessandro Turrini & Jan in 't Veld, 2003. "Can fiscal consolidations be expansionary in the EU? Ex-post evidence and ex-ante analysis," European Economy - Economic Papers 195, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  4. 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.
  5. Rzonca, Andrzej & Cizkowicz, Piotr, 2005. "Non-Keynesian effects of fiscal contraction in new member states," Working Paper Series 0519, European Central Bank.
  6. repec:tpr:qjecon:v:117:y:2002:i:4:p:1329-1368 is not listed on IDEAS
  7. Alberto Alesina & Silvia Ardagna, 1998. "Tales of fiscal adjustment," Economic Policy, CEPR;CES;MSH, vol. 13(27), pages 487-545, October.
  8. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  9. 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.
  10. Francesco Giavazzi & Tullio Jappelli & Marco Pagano, 2000. "Searching for Non-Linear Effects of Fiscal Policy: Evidence from Industrial and Developing Countries," NBER Working Papers 7460, National Bureau of Economic Research, Inc.
  11. Tullio Jappelli & Marco Pagano, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 83-109.
  12. Roberto Perotti, 1999. "Fiscal Policy in Good Times and Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1399-1436.
  13. 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.
  14. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  15. Ardagna, Silvia, 2004. "Financial markets' behavior around episodes of large changes in the fiscal stance," Working Paper Series 0390, European Central Bank.
  16. Ardagna, Silvia & Alesina, Alberto, 1998. "Tales of Fiscal Adjustment," Scholarly Articles 2579822, Harvard University Department of Economics.
  17. Ricardo J. Caballero & Arvind Krishnamurthy, 2004. "Fiscal Policy and Financial Depth," NBER Working Papers 10532, National Bureau of Economic Research, Inc.
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