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Conditions that may invalidate the prediction of the expansionary austerity policies

Author

Listed:
  • George D. Demopoulos

    (Athens University of Economics and Business)

  • Nicholas A. Yannacopoulos

    (Athens University of Economics and Business)

Abstract

The expansionary austerity policies predict that fiscal consolidation implemented mainly by a tax increase may signal that tax cuts have to be expected in the future, Consumers respond to tax cut increase by raising their estimate of their lifetime resources; as a result, they may raise consumption with corresponding positive effects in aggregate demand. The main channel through which fiscal consolidations may stimulate economic activity is that of the expectations view, which is based on two fundamental assumptions: that the horizon index of the consumer has to be infinite, and secondly that his tax expectations have to be e lastic in the Hicksian sense. However, since the assumptions are not satisfied in a word characterized by uncertainty and liquidity constraints, the expansionary effects of fiscal austerity policies (through the expectations channel) fail.

Suggested Citation

  • George D. Demopoulos & Nicholas A. Yannacopoulos, 2015. "Conditions that may invalidate the prediction of the expansionary austerity policies," Working Papers 201502, Athens University Of Economics and Business, Department of Economics.
    • Handle: RePEc:aeb:wpaper:201502:y:2015
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    More about this item

    Keywords

    Expansionary fiscal consolidation.;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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