Abstract

In this paper we study the effects of long-lasting fiscal measures on consumption, distinguishing between Keynesian effects (KE), due to changes in current disposable income, and non-Keynesian effects (NE), caused by expected changes in future disposable income. The literature has argued that fiscal contractionary adjustments can have an expansionary effect. In this paper we show that the size and sign of such NEs depend crucially on the lifetime of the representative consumer and on the timing of policy measures. Using a consumption function based on a perpetual youth model, formulated in discrete time, we show that when fiscal measures last for more than one period this may lead to "reversed" NEs, where the sign of the effect is the same as the sign for a KE. We show that there exists a simple and realistic condition where "sign"(KE) = "sign"(NE). This depends on two parameters, namely the lifetime of the representative consumer and the starting date of the offsetting fiscal policy needed to satisfy the intertemporal public sector budget constraint. We propose a number of exercises showing the relevance of the level of the public debt and its dynamics. It is shown that when measures aim to reduce public debt the effect on consumption is always negative. A number of simulations illustrate this point.