Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity

Giuseppe Bertola and Allan Drazen ()

No 599, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We present and analyse an optimizing model which explains the counter-intuitive effects of fiscal policy in terms of expectations. If government spending follows an upward-trending stochastic process, which the public believes may fall sharply when it reaches specific `target points', then optimizing consumption behaviour and simple budget constraint arithmetic imply a non-linear relationship between private consumption and government spending. This theoretical relation is consistent with the experience of several countries.

Keywords: Consumption Smoothing; Stabilization; Sustainability (search for similar items in EconPapers)
JEL-codes: E21 E62 (search for similar items in EconPapers)
Date: 1991-12
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity (1993)
Working Paper: Trigger Pointsand Budget Cuts; Explaining the Effects of Fiscal Austerity (1991)
Working Paper: Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity (1991)
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