The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence

Fatás, Antonio and Ilian Mihov
Authors registered in the RePEc Author Service: Antonio Fatas

No 2760, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper compares the dynamic impact of fiscal policy on macroeconomic variables implied by a large class of general equilibrium models with the empirical results from an identified vector autoregression. In the data we find that positive innovations in government spending are followed by strong and persistent increases in consumption and employment. The effects are particularly pronounced when government wage expenditures increase. We compare these findings to several variations of a standard real business cycle model and we find that the positive correlation in the responses of employment and consumption cannot be matched by the model under plausible assumptions for the values of the calibration parameters.

Keywords: Fiscal policy; Business cycles (search for similar items in EconPapers)
JEL-codes: E20 E30 H30 (search for similar items in EconPapers)
Date: 2001-04
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Citations: View citations in EconPapers (505)

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