Effects of fiscal policy on private consumption: Evidence from structural-balance fiscal rule deviations

Juan A. Correa, Christian Ferrada, Pablo Gutiérrez, Francisco Parro

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We use a new narrative measure of fiscal shocks to study how private consumption reacts to government spending increases. Our fiscal shocks arise from three announcements of expansionary fiscal rule deviations in a small and open economy where fiscal policy follows a structural-balance fiscal rule. All those deviations were announced to be mainly on the spending side. We find a negative response of private consumption in the face of those announcements. Our findings are consistent with the existence of consumers expecting some irreversibility in government spending increases and, as a consequence, a rise in future taxes to make the newly announced fiscal spending path consistent with the intertemporal government budget constraint.

Original languageEnglish (US)
Pages (from-to)776-781
Number of pages6
JournalApplied Economics Letters
Volume21
Issue number11
DOIs
StatePublished - Jul 2014

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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