Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity

Giuseppe Bertola and Allan Drazen ()

No 3844, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose and solve an optimizing model which explains counterintuitive effects of fiscal policy in terms of expectations. If government spending follows an upward-trending stochastic process which the public believes may fall sharply when it reaches specific "target points," then optimizing consumption behavior and simple budget constraint arithmetic imply a nonlinear relationship between private consumption and government spending. This theoretical relation is consistent with the experience of several countries.

Date: 1991-09
Note: EFG
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Published as American Economic Review, vol. 83, no. 9, pp. 11-26 March 1993

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Related works:
Journal Article: Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity (1993)
Working Paper: Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity (1991)
Working Paper: Trigger Pointsand Budget Cuts; Explaining the Effects of Fiscal Austerity (1991)
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