Conditions that may invalidate the prediction of the expansionary austerity policies

George D. Demopoulos and Nicholas A. Yannacopoulos
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George D. Demopoulos: Athens University of Economics and Business
Nicholas A. Yannacopoulos: Athens University of Economics and Business

No 201502, Working Papers from Athens University Of Economics and Business, Department of Economics

Abstract: The expansionary austerity policies predict that fiscal consolidation implemented mainly by a tax increase may signal that tax cuts have to be expected in the future, Consumers respond to tax cut increase by raising their estimate of their lifetime resources; as a result, they may raise consumption with corresponding positive effects in aggregate demand. The main channel through which fiscal consolidations may stimulate economic activity is that of the expectations view, which is based on two fundamental assumptions: that the horizon index of the consumer has to be infinite, and secondly that his tax expectations have to be e lastic in the Hicksian sense. However, since the assumptions are not satisfied in a word characterized by uncertainty and liquidity constraints, the expansionary effects of fiscal austerity policies (through the expectations channel) fail.

Keywords: Expansionary; fiscal; consolidation. (search for similar items in EconPapers)
JEL-codes: E62 E65 F32 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2015-02
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