U. Michael Bergman () and Michael M. Hutchison ()
U. Michael Bergman: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Michael M. Hutchison: Department of Economics, University of California Santa Cruz, Postal: Department of Economics, Social Sciences 1, University of California, Santa Cruz, CA 95064
Abstract: We develop an alternative test of the `German view' - that a reduction in government consumption may lead to an immediate private consumption boom - derived from an open-economy permanent income model. In our empirical study we find, in accordance with the `German view', that an anticipated permanent reduction of government consumption is associated with a strong short-run (and permanent) increase in private consumption. However, the Danish experience following the fiscal contraction in 1982 suggest that this was not a dominant factor behind the private consumption boom. Our evidence shows instead that other factors increasing permanent income, including a substantial terms-of-trade improvement, were much more important.
17 pages, March 15, 1999
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