THE RELATIONSHIP BETWEEN LARGE FISCAL ADJUSTMENTS AND SHORT‐TERM OUTPUT GROWTH UNDER ALTERNATIVE FISCAL POLICY REGIMES

Abstract

A small but growing body of literature searches for evidence of non‐Keynesian effects of fiscal contractions. That is, some evidence exists that large fiscal contractions stimulate short‐run economic activity. This article continues that research effort by systematically examining the effects (if any) of unusual fiscal events—either non‐Keynesian results within a Keynesian model or Keynesian results within a neoclassical model—on short‐run economic activity. The authors examine this issue within three separate models—a St. Louis equation, a Hall‐type consumption equation, and a growth accounting equation. The empirical findings do not provide strong systematic support for the view that unusually large fiscal contractions/expansions reverse the effects of normal fiscal events. Moreover, the authors find only limited evidence that trigger points are empirically important.