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Fiscal Crises and Aggregate Demand: Can High Public Debt Reverse the Effects of Fiscal Policy?

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Sutherland, Alan

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Abstract

This paper shows how the power of fiscal policy to affect consumption can vary depending on the level of public debt. At moderate levels of debt fiscal policy has the traditional Keynesian effects. Current generations of consumers discount future taxes because they may not be alive when taxes are raised (or there will be a larger population available to pay the taxes). But when debt reaches extreme values, current generations of consumers know there is a high probability that they will have to pay extra taxes. An increase in the fiscal deficit has a contractionary effect in these situations.

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Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1246.

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Date of creation: Sep 1995
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Handle: RePEc:cpr:ceprdp:1246

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Related research
Keywords: Aggregate Demand; Fiscal Policy; Public Debt Stabilization;

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H69 - Public Economics - - National Budget, Deficit, and Debt - - - Other

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This page was last updated on 2009-10-29.

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