Expansionary fiscal contractions: Re-evaluating the Danish case
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Expansionary fiscal contractions : Re-evaluating the Danish case. / Bergman, Ulf Michael; Hutchison, Michael.
I: International Economic Journal, Bind 24, Nr. 1, 2010, s. 71-93.Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt
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TY - JOUR
T1 - Expansionary fiscal contractions
T2 - Re-evaluating the Danish case
AU - Bergman, Ulf Michael
AU - Hutchison, Michael
N1 - JEL classifications: E21, E62, E65
PY - 2010
Y1 - 2010
N2 - The Expansionary Fiscal Contraction (EFC) hypothesis predicts that a major fiscal consolidation leads to an economic expansion under certain circumstances. We test this hypothesis, and the implied non-linear responses of the economy to large and small changes in fiscal policy, using data from the 1983 Danish fiscal reform. We use a structural VAR/event study methodology following Blanchard and Perotti (2002) that explicitly allows us to distinguish between normally marginal changes in fiscal policy and comprehensive fiscal reforms. We find that 'marginal changes' in fiscal policy (expenditure and tax changes) have the expected Keynesian effects on output and consumption. However, we find no evidence that the large fiscal consolidation in Denmark slowed the economy after controlling for a host of exogenous shocks and business cycle effects. Rather, we find some support for the hypothesis that the exogenous fiscal contraction in Denmark was a credible regime shift and, together with other reforms undertaken at the time, increased both private consumption and aggregate output.
AB - The Expansionary Fiscal Contraction (EFC) hypothesis predicts that a major fiscal consolidation leads to an economic expansion under certain circumstances. We test this hypothesis, and the implied non-linear responses of the economy to large and small changes in fiscal policy, using data from the 1983 Danish fiscal reform. We use a structural VAR/event study methodology following Blanchard and Perotti (2002) that explicitly allows us to distinguish between normally marginal changes in fiscal policy and comprehensive fiscal reforms. We find that 'marginal changes' in fiscal policy (expenditure and tax changes) have the expected Keynesian effects on output and consumption. However, we find no evidence that the large fiscal consolidation in Denmark slowed the economy after controlling for a host of exogenous shocks and business cycle effects. Rather, we find some support for the hypothesis that the exogenous fiscal contraction in Denmark was a credible regime shift and, together with other reforms undertaken at the time, increased both private consumption and aggregate output.
KW - Faculty of Social Sciences
KW - structural VAR
KW - event study
KW - non-linearities
U2 - 10.1080/10168731003589857
DO - 10.1080/10168731003589857
M3 - Journal article
VL - 24
SP - 71
EP - 93
JO - International Economic Journal
JF - International Economic Journal
SN - 1016-8737
IS - 1
ER -
ID: 18475398