Discussion Paper Details

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Title: The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence

Author(s): Antonio Fatás and Ilian Mihov

Publication Date: April 2001

Keyword(s): Business Cycles and Fiscal Policy

Programme Area(s): International Macroeconomics

Abstract: This Paper compares the dynamic impact of fiscal policy on macroeconomic variables implied by a large class of general equilibrium models with the empirical results from an identified vector autoregression. In the data we find that positive innovations in government spending are followed by strong and persistent increases in consumption and employment. The effects are particularly pronounced when government wage expenditures increase. We compare these findings to several variations of a standard real business cycle model and we find that the positive correlation in the responses of employment and consumption cannot be matched by the model under plausible assumptions for the values of the calibration parameters.

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Bibliographic Reference

Fatás, A and Mihov, I. 2001. 'The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence'. London, Centre for Economic Policy Research.