Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/173160 
Year of Publication: 
2017
Series/Report no.: 
BERG Working Paper Series No. 132
Publisher: 
Bamberg University, Bamberg Economic Research Group (BERG), Bamberg
Abstract: 
We analyze fiscal consolidations using a New Keynesian model where agents have heterogeneous expectations and are uncertain about the composition of consolidations. We look at spending-based and tax-based consolidations and analyze their effects separately. We find that the effects of consolidations and the output multipliers are sensitive to heterogeneity in expectations before and after implementation of a specific fiscal plan. Depending on the beliefs about the type of consolidation prior to implementation, we show that heterogeneity in expectations may lead to optimism in the economy, improving thus the performance of a specific fiscal plan, or can work towards the opposite direction leading to pessimism, amplifying the contractionary effects of the consolidation. In general, we find that spending-based consolidations last longer and lead to deeper recessions when agents are boundedly rational compared to the rational expectations benchmark, while the opposite holds for tax-based consolidations.
Subjects: 
fiscal policy
uncertainty
heterogeneous expectations
bounded rationality
JEL: 
H60
D83
E32
E62
E63
H30
ISBN: 
978-3-943153-53-8
Document Type: 
Working Paper

Files in This Item:
File
Size
904.24 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.