Working Paper: CEPR ID: DP1246
Authors: Alan Sutherland
Abstract: This paper shows how the power of fiscal policy to affect consumption can vary depending on the level of public debt. At moderate levels of debt fiscal policy has the traditional Keynesian effects. Current generations of consumers discount future taxes because they may not be alive when taxes are raised (or there will be a larger population available to pay the taxes). But when debt reaches extreme values, current generations of consumers know there is a high probability that they will have to pay extra taxes. An increase in the fiscal deficit has a contractionary effect in these situations.
Keywords: Fiscal Policy; Public Debt; Stabilization; Aggregate Demand
JEL Codes: E21; E62; H69
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal Deficit at Low Public Debt (H68) | Increased Consumption (E21) |
| Fiscal Deficit at High Public Debt (H68) | Decreased Consumption (E21) |
| Public Debt (H63) | Expected Future Taxes (H29) |
| Expected Future Taxes (H29) | Consumption (E21) |
| Public Debt (H63) | Consumer Expectations of Future Tax Burden (H31) |
| Consumer Expectations of Future Tax Burden (H31) | Consumption (E21) |