Abstract
Barry and Devereux (2003) have identified two conditions for permanent fiscal contractions to be expansionary. The first condition is that households do not face an effective infinite horizon. The second is that the wealth effect of reduced tax liabilities on labor supply must be small if labor supply is endogenous. However, Barry and Devereux have not allowed for the possibility that government spending may affect the intertemporal allocation of private consumption. By allowing for the possibility, this paper identifies a third condition for permanent fiscal contractions to be expansionary, namely that public and private consumption must not be too highly substitutable.
Published Version
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