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Expansionary fiscal contractions? Evidence from panel data

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  • Vincent (Vincent Peter) Hogan

Abstract

We examine the ability of the Expansionary Fiscal Contraction (EFC) hypothesis to explain the performance of of OECD economies during times of crisis. We find some limited evidence in its favour: if public consumption is reduced in response to a fiscal crisis (as defined by a high level of debt), private consumption does seem to increase. However the size of the effect is smaller than that typically found in similar studies. Furthermore, the increase in private consumption is not usually sufficient to offset the direct effect of a reduction in the public consumption on output fiscal contractions are not literally expansionary.

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  • Vincent (Vincent Peter) Hogan, 2003. "Expansionary fiscal contractions? Evidence from panel data," Working Papers 200303, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:200303
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    File URL: http://hdl.handle.net/10197/933
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    References listed on IDEAS

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    5. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    6. Francesco Giavazzi & Marco Pagano, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," NBER Working Papers 5332, National Bureau of Economic Research, Inc.
    7. 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.
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    Cited by:

    1. Guo, Yue Mei & Shi, Yun Rui, 2021. "Impact of the VAT reduction policy on local fiscal pressure in China in light of the COVID-19 pandemic: A measurement based on a computable general equilibrium model," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 253-264.
    2. Vitor M. Carvalho & Manuel M. F. Martins, 2011. "Macroeconomic effects of fiscal consolidations in a DSGE model for the Euro Area: does composition matter?," FEP Working Papers 421, Universidade do Porto, Faculdade de Economia do Porto.
    3. Berben, Robert-Paul & Brosens, Teunis, 2007. "The impact of government debt on private consumption in OECD countries," Economics Letters, Elsevier, vol. 94(2), pages 220-225, February.
    4. Berben, Robert-Paul & Brosens, Teunis, 2007. "The impact of government debt on private consumption in OECD countries," Economics Letters, Elsevier, vol. 94(2), pages 220-225, February.
    5. Ahmed Waqar Qasim & M. Ali Kemal & Omer Siddique, 2015. "Fiscal Consolidation and Economic Growth: A Case Study of Pakistan," PIDE-Working Papers 2015:124, Pakistan Institute of Development Economics.
    6. Thibault Lemaire, 2020. "Fiscal Consolidations and Informality in Latin America and the Caribbean," Post-Print halshs-02492309, HAL.
    7. El-Shagi, Makram & Schweinitz, Gregor von, 2021. "Fiscal policy and fiscal fragility: Empirical evidence from the OECD," Journal of International Money and Finance, Elsevier, vol. 115(C).
    8. Vitor Carvalho & Manuel M. F. Martins, 2011. "Investment and output effects of fiscal consolidations in a new-Keynesian DSGE model for the Euro Area: composition matters?," EcoMod2011 3246, EcoMod.
    9. Ioannis Kostakis, 2017. "The impact of shadow economy and/or corruption on private consumption: further evidence from selected Eurozone economies," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 7(3), pages 411-434, December.
    10. Maria Gabriella Briotti, 2005. "Economic reactions to public finance consolidation - a survey of the literature," Occasional Paper Series 38, European Central Bank.
    11. Niamh Hardiman, 2013. "Rethinking the political economy of fiscal consolidation in two recessions in Ireland," Working Papers 201316, Geary Institute, University College Dublin.
    12. Gabriele Giudice & Alessandro Turrini & Jan in’t Veld, 2007. "Non-Keynesian Fiscal Adjustments? A Close Look at Expansionary Fiscal Consolidations in the EU," Open Economies Review, Springer, vol. 18(5), pages 613-630, November.

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    More about this item

    Keywords

    Consumption; Saving; Fiscal policy; Organisation for Economic Co-operation and Development; Fiscal policy; Saving and investment;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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