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The 'German View', Fiscal Consolidation and Consumption Booms: Empirical Evidence from Denmark

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  • U. Michael Bergman
  • Michael M. Hutchison
Abstract
We develop an alternative test of the 'German View' that fiscal contractions may lead to immediate consumption booms derived from a form of an open-economy permanent income model where we add uncertainty over whether shocks are permanent or transitory. Using a time-series statistical methodology, we distinguish between three shifts to "permanent" income - those arising from permanent shifts in government expenditure, terms-of-trade and "other" factors including cost and productivity shocks. We are also able to identify a composite transitory disturbance on consumption, which incorporates short-run aggregate demand considerations and business cycle effects. In our empirical study we find, in accordance with the 'German View', that an anticipated permanent reduction of government expenditure is associated with a strong short-run (and permanent) increase in private consumption. However, the Danish experience following the fiscal contraction in 1982 suggest that this was not a dominant factor behind the consumption boom. Our evidence shows instead that other factors increasing permanent income, including a substantial terms-of-trade improvement, were much more important.

Suggested Citation

  • U. Michael Bergman & Michael M. Hutchison, "undated". "The 'German View', Fiscal Consolidation and Consumption Booms: Empirical Evidence from Denmark," EPRU Working Paper Series 96-10, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:epruwp:96-10
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    Cited by:

    1. Bergman, Michael, 2000. "The 'Expansionary Fiscal Contraction Hypothesis' and Uncertainty About the Permanence of Fiscal Consolidations," Working Papers 2000:2, Lund University, Department of Economics.
    2. Hjelm, Göran & Johansson, Martin W, 2002. "Structural Change in Fiscal Policy and The Permanence of Fiscal Contractions - The Case of Denmark and Ireland," Working Papers 2002:11, Lund University, Department of Economics.
    3. Jerome Creel, 1998. "L'assainissement budgétaire au Danemark entre 1983 et 1986 : l'anti-mythe (in French)," Documents de Travail de l'OFCE 1998-02, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. Hjelm, Goran, 2002. "Is private consumption growth higher (lower) during periods of fiscal contractions (expansions)?," Journal of Macroeconomics, Elsevier, vol. 24(1), pages 17-39, March.
    5. repec:bla:scandj:v:104:y:2002:i:3:p:423-41 is not listed on IDEAS

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