Fiscal multipliers, public debt anchor and government credibility in a behavioural macroeconomic model

 In the context of the ongoing series of crises since the beginning of the 21st century (also called the polycrisis or permacrisis), fiscal rules are proving to be both insufficient and unsuitable to cushion economic shocks and stabilise public debt. Meanwhile, economic facts have highlighted the major role played by economic agents’ expectations. This paper aims to fill a gap in the literature on fiscal credibility and government performance, both in terms of stabilising the economy (via fiscal multipliers) and of fiscal discipline. This paper offers an innovative theoretical insight into the role of government credibility in a framework where economic agents’ expectations are based on ‘‘animal spirits’’. Results show that when agents are optimistic about the future output-gap and public debt, the fiscal multiplier tends to be larger whatever the nature of the fiscal shock (public expenditure or consumption tax). It also appears that fiscal expansion deteriorated, to a lesser extent, the public debt. Furthermore, agents’ expectations about public debt and the fiscal credibility of the government turn out to affect government performance (the fiscal multiplier and public debt stability).

Author: Amélie; Thierry; Théo, Barbier-Gauchard; Betti; Metz
Volume: 2024.02
Publisher: INFER
Year: 2024
No. of pages: 8
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