The Asymmetric Effects of Fiscal Policy on Private Consumption over the Business Cycle

Athanasios Tagkalakis

No ECO2004/19, Economics Working Papers from European University Institute

Abstract: This paper explores on a yearly panel of nineteen OECD countries from 1970-2001 the effects of fiscal policy on private consumption in recessions and expansions. In the presence of binding liquidity constraints on households, fiscal policy is more e¤ective in boosting private consumption in recessions than in expansions. The effect is more pronounced in countries characterized by a less developed consumer credit market. This happens because the fraction of individuals that face binding liquidity constraints in a recession will consume the extra income generated following a tax cut or government spending increase.

Keywords: Fiscal policy; Liquidity constraints; Consumption; Recessions (search for similar items in EconPapers)
JEL-codes: E21 E32 E62 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-mac
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