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Fiscal consolidation as a self-fulfilling prophecy on fiscal multipliers

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  • Hubert Bukowski

Abstract

Fiscal policy may affect the size of the fiscal multiplier or lengthen the elevated multipliers period. This notion at first seems controversial, however it is only an outcome of combining two strands of already available literature together. The first strand touches the effects of fiscal policy on economic situation, the second one suggests economic situation affects fiscal multiplier. Having those two premises implies that fiscal policy could indirectly influence the fiscal multiplier size or the length of the elevated multiplier period. This possibility is fitted into a simple model of liquidity trap with hysteresis effects. One of the main outcomes of the model is that, when the government expectations on the size of the fiscal multiplier influence fiscal actions - as it is possibly the case - those expectations may become selffulfilling prophecies.

Suggested Citation

  • Hubert Bukowski, 2015. "Fiscal consolidation as a self-fulfilling prophecy on fiscal multipliers," NBP Working Papers 217, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:217
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    References listed on IDEAS

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    1. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
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    More about this item

    Keywords

    fiscal multiplier; self-fulfilling prophecy; fiscal consolidation timing;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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