Expansionary Fiscal Contractions?

Abstract

We examine the usefulness of the Expansionary Fiscal Contrac- tion hypothesis in explaining the performance of the Irish and Danish economies. We find some evidence in favour of a weak version of the EFC hypotheisis - If the budget deficit is reduced in response to a fis- cal crisis, consumption does seem to increase. However this increase is not enough to offset the direct effect of a reduction in the deficit on output-fiscal contractions are not literally expansionary.