Research Discussion Papers, Bank of Finland
No 2/1997:
Fiscal Policy and Private Consumption-Saving Decisions: Evidence from Nine EU Countries
Anne Brunila ()
Abstract: This paper considers the effects of fiscal policy on
private consumption in a framework that encompasses both the conventional
(Keynesian) view of fiscal policy and the Ricardian debt neutrality
hypothesis. The model is built on Blanchard's stochastic model of
intertemporal optimization with finitely lived consumers. As an extension
to the basic framework, the model also nests various hypotheses concerning
the relationship between public spending and private consumption. Empirical
analyses are based on annual data from nine EU countries covering the years
1961–1994 and use the nonlinear instrumental variable GMM estimator both in
country-specific and in panel estimations. The tests cannot reject the
hypothesis that consumers are Ricardian except for one country. Moreover,
the results suggest that in the consumers' utility functions, government
consumption tends to be a complement rather than a substitute for private
consumption.
Keywords: private consumption; private saving; fiscal policy; planning horizon; (follow links to similar papers)
39 pages, February 10, 1997
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