Expansionary fiscal contractions? Evidence from panel data

We examine the ability of the expansionary fiscal contraction (EFC) hypothesis to explain the performance of OECD economies during fiscal crises. We find some limited evidence in its favour: if public consumption is reduced in response to a fiscal crisis (as defined by a high level of debt), private consumption does seem to increase. However, the size of the effect is smaller than that typically found in other studies. Furthermore, the increase in private consumption is usually not sufficient to offset the direct effect of a reduction in public consumption on output-fiscal contractions are not literally expansionary.