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Expansionary Fiscal Contraction: Government Spending Financed By Lump-Sum Taxes

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  • KIM-HENG TAN

    (School of Humanities and Social Sciences, Nanyang Technological University, S3-B2A-05 Nanyang Avenue, Singapore 639798, Republic of Singapore)

Abstract

Barry and Devereux (2003) have identified two conditions for permanent fiscal contractions to be expansionary. The first condition is that households do not face an effective infinite horizon. The second is that the wealth effect of reduced tax liabilities on labor supply must be small if labor supply is endogenous. However, Barry and Devereux have not allowed for the possibility that government spending may affect the intertemporal allocation of private consumption. By allowing for the possibility, this paper identifies a third condition for permanent fiscal contractions to be expansionary, namely that public and private consumption must not be too highly substitutable.

Suggested Citation

  • Kim-Heng Tan, 2004. "Expansionary Fiscal Contraction: Government Spending Financed By Lump-Sum Taxes," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 49(02), pages 225-232.
    • Handle: RePEc:wsi:serxxx:v:49:y:2004:i:02:n:s0217590804000895
    DOI: 10.1142/S0217590804000895
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    References listed on IDEAS

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    1. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2002. "Fiscal Policy, Profits, and Investment," American Economic Review, American Economic Association, vol. 92(3), pages 571-589, June.
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