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When do fiscal consolidations lead to consumption booms? Lessons from a laboratory experiment

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According to the expectations channel, a fiscal consolidation may give rise to less contractionary, or even expansionary effects on consumption, despite a decline in current disposable income. Intuitively, people may accumulate a stock of savings in anticipation of the consolidation and may start to reduce their savings to support consumption once it occurs. We design a laboratory experiment to study the conditions under which the expectations channel operates. Our results indicate that fiscal contractions that occur in an unsustainable fiscal environment exert less contractionary effects on consumption, which supports the expectations channel. We also find that the expectations channel is more pronounced if the fiscal authority can convincingly commit to abstain from tax increases in the future, whereas increasing subjects׳ level of awareness by running a transparent policy has only little influence on the outcomes.
Original languageEnglish
Pages (from-to)1-20
JournalJournal of Economic Dynamics and Control
Volume69
Early online date15 May 2016
DOIs
Publication statusPublished - 16 Aug 2016

Documents

  • LUHAN_2016_cright_JEDC_When do fiscal consolidations lead to consumption booms

    Rights statement: NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Economic Dynamics and Control. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Dynamics and Control, 69, 2016, DOI: 10.1016/j.jedc.2016.05.003

    Accepted author manuscript (Post-print), 431 KB, PDF document

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