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Estimating the effects of fiscal policy under the budget constraint

Peter Claeys ()

wp.comunite from Department of Communication, University of Teramo

Abstract: I reconsider the short-term effects of fiscal policy when both government spending and taxes are allowed to respond to the level of public debt. I embed the long-term government budget constraint in a VAR, and apply this common trends model to US quarterly data. The main finding is that fiscal consolidation has expansionary effects on output and inflation. Non-Keynesian effects also dominate when debt expands. The expectation of policy adjustments to guarantee fiscal sustainability by future tax rises or spending cuts contracts output today.

Keywords: Fiscal policy; sustainability; spending; taxes; common trends; SVAR (search for similar items in EconPapers)
JEL-codes: E42 E63 E65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2008-02
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Working Paper: Estimating the effects of fiscal policy under the budget constraint (2007) Downloads
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