The Effects of Fiscal Policy on Consumption in Good and Bad Times

Atanas Hristov

MPRA Paper from University Library of Munich, Germany

Abstract: I examine the effects of fiscal policy actions on private consumption in a yearly panel of sixteen OECD countries conditional on the phase of the business cycle and the state of the public finances. I demonstrate that binding liquidity constraints on households can alter the efficacy of the policy changes in the four regimes—defined by the conditioning states—with expansionary fiscal policy boosting consumption in recessions, having a nil effect on it in normal times or in fiscal stress, and strongly displacing consumption in mixed states when recession and fiscal stress coincide. This happens because the liquidity constrained households consume the additional income generated by an expansionary fiscal policy in recession, and save it in normal times or in fiscal stress when liquidity constraints are not binding. If recession and fiscal stress coincide, fiscal action have an extra distortionary effect on income, and consequently on consumption.

Keywords: Fiscal policy; Consumption; Public Deficit, Debt; Liquidity constraints (search for similar items in EconPapers)
JEL-codes: E20 E32 E62 H30 (search for similar items in EconPapers)
Date: 2013-02-03
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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