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
29 pages, February 2, 2001
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