Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2001:1: Is Private Consumption Growth Higher (Lower) During Periods of Fiscal Contractions (Expansions)?

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: Case studies have claimed that private consumption growth is higher during fiscal contractions due to the very fact that government spending is cut. Indeed, neoclassical theory has this implication. This paper uses regression analysis of a panel of 19 OECD countries and shows that this is not true in general. On the contrary, contraction (expansion) periods experience lower (higher) private consumption growth which questions the genrality of the findings in case studies. We find, instead, that preceding exchange rate movements have a significant effect on the private consumption response of fiscal contractions which highlights a rather different expectational channel

Keywords: Fiscal policy; Fiscal contractions and expansions; Private consumption; Panel data

JEL-codes: E21; E63; H30

29 pages, February 2, 2001

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