Fiscal episodes in the Economic and Monetary Union: Elasticities and non‐Keynesian effects

Abstract

We estimate short-and long-run elasticities of private consumption for fiscal instruments, using a fixed-effects model for the 19 Euro area countries during the period of 1960-2017, to assess how fiscal elasticities vary during fiscal episodes. According to the results, positive 'tax revenue' elasticities indicate that consumers have Ricardian behaviour, whereby they perceive an increase in taxation to be a sign of future government spending. 'social benefits' appear to have a non-Keynesian effect on private consumption. In addition, using a narrative approach to identify fiscal consolidations, it is seen that private consumption continues to exhibit a non-Keynesian response to tax increases, both in the short and long-run, and 'other expenditures' have a recessive impact during 'normal times'. Furthermore, 'social benefits' are more contractionary in consolidations than in both expansions and 'normal times'. In addition, after the launch of the Economic and Monetary Union, expansionary fiscal consolidations became harder to observe, and 'other expenditure' and 'investment' lost their non-Keynesian role.

Government Expenditure and Economic Growth Nexus in Ghana

“…Numerous studies conducted from 1990 to 2016 revealed that economic growth and government expenditure have a positive relationship with each other. Optimising government spending is characterised by a crowding-in effect with economic growth (Afonso & Leal, 2020;Alshammary et al, 2020). In a similar vein, the study conducted by Abotsi (2021) utilised a panel comprising 95 countries to examine the correlation between fiscal policy and investment over the period spanning from 1970 to 2008.…”

To consolidate or not to consolidate? A multi-step analysis to assess needed fiscal sustainability

“…Notwithstanding the relevance of fiscal policy sustainability, analyses on the so-called expansionary fiscal consolidations has received much attention. The macroeconomic effects of such fiscal consolidations, related with the notion of non-Keynesian effects, are well described in the literature (see, for instance, von Hagen and Strauch, 2001, van Aarle and Garretsen, 2003, Giudice et al, 2007, Alesina et al, 2015, Alesina et al, 2019, Afonso and Leal, 2020, Afonso et al, 2021. In addition to looking at the non-Keynesian effects, the literature has devoted time and effort to identify fiscal episodes, i.e., periods when the change in the cyclically adjusted primary balance is greater than an ad-hoc positive threshold value (contractionary "discretionary" fiscal policy) or lower than a negative threshold value (expansionary "discretionary" fiscal policy).…”

Essays on fiscal policy: empirical evidence from SSA countries

“…This school of thought assumes that the economy has an excess capacity and that there are also liquidityconstrained individuals in the economy. Therefore, fiscal policy can stimulate aggregate demand through private consumption, which can induce the labor market and activate private investment to respond quickly to fiscal shocks (Brinca et al, 2016;Afonso -Leal, 2022). However, fiscal adjustments are expected to reduce aggregate demand and, thus, output.…”