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Title:The Benefits of Gradualism in Government Expenditure Changes: Theory and Experimental Evidence PDF Logo
Authors:von Hagen, Jürgen
Kube, Sebastian
Kaiser, Johannes
Selten, Reinhard
Pope, Robin
Issue Date:2006
Series/Report no.:Bonn econ discussion papers 2006,26
Abstract:Government expenditure can be highly variable, if used as a countercyclical instrument, or as a response to economic crises or as a means of rapidly altering other features of the economy. An alternative policy setting is to keep government expenditure changes gradual and modest. It is shown that whether a more discretionary or a more stable usage of government expenditures better attains official sector macroeconomic goals is difficult to determine theoretically, in part because of missed risk effects. But the detecting which policy better meets the official sector macroeconomic goals from analysis of historical data or inter-country comparisons suffers from confounding events and institutions. This study offers a fresh insight from laboratory experiments. Our laboratory results favour gradualism in government expenditures, ie support the advocacy of more stable government expenditures offered in Friedman (1969), in Vernengo and Rochon (2000), and in the 2006 German tax change controversy, by that country?s local government sector.
Subjects:gradualism
shock therapy
discretionary or counter-cyclical government expenditure
laboratory experiments
JEL:D80
D90
B20
E60
E62
E69
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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