Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2000:2:
The 'Expansionary Fiscal Contraction Hypothesis' and Uncertainty About the Permanence of Fiscal Consolidations

Michael Bergman ()

Abstract: This paper contrasts the effects of balanced-budget reductions in government consumption on private consumption in the permanent income model and a model allowing for precautionary savings. We compare impulse responses of private consumption to temporary and permanent shocks to government consumption when agents do not observe the shocks directly or can distinguish between temporary and permanent shocks. Our simulations suggest that uncertainty about the permanence of government consumption reductions affect both the impact and the duration of private consumption whereas precautionary saving motives only affect the impact.

Keywords: Expansionary fiscal contraction; fiscal consolidations; uncertainty; precautionary savings; (follow links to similar papers)

JEL-Codes: E21; E62; (follow links to similar papers)

21 pages, March 6, 2000

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