Fiscal policy and private investment in Greece

Maria Kasselaki () and Athanasios Tagkalakis

International Economics, 2016, issue 147, 53–106

Abstract: This paper investigates the effects of fiscal policy on private non-residential investment and output in Greece. Besides examining the direct effects of fiscal consolidation, we investigate the role of financial markets and economic sentiment in the transmission of fiscal policy shocks. A tax based fiscal consolidation has more pronounced and more protracted negative effects on output and private non-residential investment relative to an expenditure based fiscal consolidation. A government spending-based fiscal consolidation improves financial markets and boosts economic sentiment. This in turn mitigates the direct negative effects of fiscal consolidation on private investment and output leading to a more rapid recovery. On the other hand, a tax hike fails to induce this positive confidence effect magnifying the negative effects of fiscal adjustment.

Keywords: Fiscal consolidation; Investment; Output; Financial markets; Economic sentiment (search for similar items in EconPapers)
JEL-codes: E22 E44 E62 O52 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepiie:2016-q3-147-3

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