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Effects of fiscal policy on private consumption: evidence from structural-balance fiscal rule deviations

Juan Correa, Christian Ferrada, Pablo Guti�rrez and Francisco Parro
Authors registered in the RePEc Author Service: Pablo A. Gutiérrez C. ()

Applied Economics Letters, 2014, vol. 21, issue 11, 776-781

Abstract: We use a new narrative measure of fiscal shocks to study how private consumption reacts to government spending increases. Our fiscal shocks arise from three announcements of expansionary fiscal rule deviations in a small and open economy where fiscal policy follows a structural-balance fiscal rule. All those deviations were announced to be mainly on the spending side. We find a negative response of private consumption in the face of those announcements. Our findings are consistent with the existence of consumers expecting some irreversibility in government spending increases and, as a consequence, a rise in future taxes to make the newly announced fiscal spending path consistent with the intertemporal government budget constraint.

Date: 2014
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DOI: 10.1080/13504851.2014.889796

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