Fiscal Policy Regimes and Household Consumption

Abstract

This paper investigates how different factors, such as size, duration and composition of fiscal changes, can alter the effects of fiscal policy on private consumption. Using an unbalanced panel of 19 OECD countries during the period 1960–2000, it is found that transfer changes are believed to be permanent during fiscal contractions. Hence, it is more likely that an expansionary fiscal contraction will occur if the government cuts transfers. This result highlights the importance of taking into account specific circumstances, such as the debt and deficit position, when studying expansionary fiscal contractions. The results also indicate that expansionary fiscal contractions are likely to come at a considerable social cost.