Fiscal Policy and Private Consumption in Industrial and Developing Countries

This paper empirically studies the effects of fiscal policy shocks on private consumption. Further, it tries to determine if the initial conditions of the economy, such as the financing needs of the government or previous fiscal deficits, affect that relationship. We use yearly data between 1970 and 2000 for forty countries, of which 19 are industrialized and 21 are developing countries. In general, the estimation results seem to indicate that government consumption shocks have Keynesian effects for both industrial and developing countries. In the case of tax shocks, the evidence is mixed. Furthermore, there is no evidence that favor the hypothesis of expansionary fiscal consolidations.