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

Giuseppe Bertola and Allan Drazen ()

American Economic Review, 1993, vol. 83, issue 1, 11-26

Abstract: The authors propose and solve an optimizing model that explains counterintuitive effects of fiscal policy in terms of expectations. If government spending follows an upward-trending stochastic process that the public believes may fall sharply when it reaches specific "trigger" points, then optimizing consumption behavior and simple budget-constraint arithmetic imply a nonlinear relationship between private consumption and government spending. Th is theoretical relation is consistent with the experience of several countries. Copyright 1993 by American Economic Association.

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