When do fiscal consolidations lead to consumption booms? Lessons from a laboratory experiment

Martin Geiger, Wolfgang Luhan and Johann Scharler

Journal of Economic Dynamics and Control, 2016, vol. 69, issue C, 1-20

Abstract: According to the expectations channel, a fiscal consolidation may give rise to less contractionary, or even expansionary effects on consumption, despite a decline in current disposable income. Intuitively, people may accumulate a stock of savings in anticipation of the consolidation and may start to reduce their savings to support consumption once it occurs. We design a laboratory experiment to study the conditions under which the expectations channel operates. Our results indicate that fiscal contractions that occur in an unsustainable fiscal environment exert less contractionary effects on consumption, which supports the expectations channel. We also find that the expectations channel is more pronounced if the fiscal authority can convincingly commit to abstain from tax increases in the future, whereas increasing subjects׳ level of awareness by running a transparent policy has only little influence on the outcomes.

Keywords: Expansionary fiscal consolidation; Expectations; Intertemporal choice; Experimental macroeconomics (search for similar items in EconPapers)
JEL-codes: C91 E21 E62 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (9)

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Working Paper: When do Fiscal Consolidations Lead to Consumption Booms? Lessons from a Laboratory Experiment (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:69:y:2016:i:c:p:1-20

DOI: 10.1016/j.jedc.2016.05.003

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