Estimating the effects of fiscal policy under the budget constraint

I reconsider the short-term effects of fiscal policy when both government spending and taxes are allowed to respond to the level of public debt. I embed the long-term government budget constraint in a VAR, and apply this common trends model to US quarterly data. The main finding is that fiscal consolidation has expansionary effects on output and inflation. Non-Keynesian effects also dominate when debt expands. The expectation of policy adjustments to guarantee fiscal sustainability by future tax rises or spending cuts contracts output today.