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Expansionary Fiscal Contractions? Evidence from Panel Data

  • Vincent Hogan

    (University College Dublin)

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 defned 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 su±cient to offset the direct e®ect of a reduction in the public consumption on output{ fiscal contractions are not literally expansionary.

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File URL: http://www.ucd.ie/economics/research/papers/2003/WP03.03.pdf
File Function: First version, 2003
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Paper provided by School of Economics, University College Dublin in its series Working Papers with number 200303.

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Length: 21 pages
Date of creation: 23 Jan 2003
Date of revision:
Handle: RePEc:ucn:wpaper:200303
Contact details of provider: Postal: UCD, Belfield, Dublin 4
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Web page: http://www.ucd.ie/economics

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  1. 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.
  2. Francesco Giavazzi & Tullio Jappelli & Marco Pagano, . "Searching for Non-Keynesian Effects of Fiscal Policy," Working Papers 136, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
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