The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence

36 Pages Posted: 18 Apr 2001

See all articles by Antonio Fatás

Antonio Fatás

INSEAD; Centre for Economic Policy Research (CEPR); ABFER

Ilian Mihov

INSEAD; Centre for Economic Policy Research (CEPR)

Date Written: April 2001

Abstract

This Paper compares the dynamic impact of fiscal policy on macroeconomic variables implied by a large class of general equilibrium models with the empirical results from an identified vector autoregression. In the data we find that positive innovations in government spending are followed by strong and persistent increases in consumption and employment. The effects are particularly pronounced when government wage expenditures increase. We compare these findings to several variations of a standard real business cycle model and we find that the positive correlation in the responses of employment and consumption cannot be matched by the model under plausible assumptions for the values of the calibration parameters.

Keywords: Business cycles, fiscal policy

JEL Classification: E20, E30, H30

Suggested Citation

Fatas, Antonio and Mihov, Ilian, The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence (April 2001). CEPR Discussion Paper No. 2760. Available at SSRN: https://ssrn.com/abstract=267281

Antonio Fatas (Contact Author)

INSEAD ( email )

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HOME PAGE: http://faculty.insead.edu/fatas

Centre for Economic Policy Research (CEPR)

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ABFER ( email )

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Ilian Mihov

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, Singapore 138680
Singapore
+65 6799 5434 (Phone)

HOME PAGE: http://www.insead.edu/facultyresearch/faculty/personal/imihov/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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