Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 1999:009: The Effects of Fiscal Contractions: A Circumstantial Approach

Göran Hjelm ()
Additional contact information
Göran Hjelm: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: Why do some fiscal contractions generate a favorable macroeconomic outcome while others do not? Using both descriptive statistics and regression analysis of 19 OECD countries for the period 1970-97, this paper finds that preceding depreciations are important for a favorable macroeconomic outcome and, in particular, private consumption response to a fiscal contraction. The same appears to be true for high preceding growth (not the level) of the debt ratio. Hence, the results suggest that one has to be cautious when interpreting the causes of the effects of fiscal contractions as preceding circumstances matter.

Keywords: Fiscal policy; Devaluation; Debt; Panel data

JEL-codes: E21; E63; H30

29 pages, December 16, 1999

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