Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity

27 Pages Posted: 14 Aug 2007 Last revised: 15 Jul 2010

See all articles by Giuseppe Bertola

Giuseppe Bertola

Centre for Economic Policy Research (CEPR); Università di Torino - Dip. di Economia e Statistica

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: September 1991

Abstract

We propose and solve an optimizing model which explains counterintuitive effects of fiscal policy in terms of expectations. If government spending follows an upward-trending stochastic process which the public believes may fall sharply when it reaches specific "target points," then optimizing consumption behavior and simple budget constraint arithmetic imply a nonlinear relationship between private consumption and government spending. This theoretical relation is consistent with the experience of several countries.

Suggested Citation

Bertola, Giuseppe and Drazen, Allan, Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity (September 1991). NBER Working Paper No. w3844. Available at SSRN: https://ssrn.com/abstract=473977

Giuseppe Bertola (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Università di Torino - Dip. di Economia e Statistica ( email )

Lungo Dora Siena 100
Torino, 10153
Italy
+39 011 670 4405 (Phone)

HOME PAGE: http://https://sites.google.com/site/gipbert

Allan Drazen

University of Maryland - Department of Economics ( email )

College Park, MD 20742-1815
United States
301-405-3477 (Phone)
301-405-7835 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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