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Title: Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity

Author(s): Giuseppe Bertola and Allan Drazen

Publication Date: December 1991

Keyword(s): Consumption Smoothing, Stabilization and Sustainability

Programme Area(s): International Macroeconomics

Abstract: We present and analyse an optimizing model which explains the counter-intuitive effects of fiscal policy in terms of expectations. If government spending follows an upward-trending stochastic process, which the public believes may fall sharply when it reaches specific `target points', then optimizing consumption behaviour and simple budget constraint arithmetic imply a non-linear relationship between private consumption and government spending. This theoretical relation is consistent with the experience of several countries.

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Bibliographic Reference

Bertola, G and Drazen, A. 1991. 'Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=599