Case studies have claimed that private consumption growth is higher during fiscal contractions due to the very fact that government spending is cut. Indeed, neoclassical theory has this implication. This paper uses regression analysis of a panel of 19 OECD countries and shows that this is not true in general. On the contrary, contraction (expansion) periods experience lower (higher) private consumption growth which questions the generality of the findings in case studies. We find, instead, that preceding exchange rate movements have a significant effect on the private consumption response of fiscal contractions which highlights a rather different expectational channel. (C) 2002 Elsevier Science Inc. All rights reserved.
Subject classification (UKÄ)
- panel data
- private consumption
- fiscal policy
- fiscal contractions and expansions