Fiscal Episodes in the EMU: Elasticities and Non-Keynesian Effects

In this working paper, António Afonso (ISEG – Lisbon School of Economics and Management, Universidade de Lisboa; REM – Research in Economics and Mathematics, UECE) and Frederico Silva Leal (ISEG – Lisbon School of Economics and Management, Universidade de Lisboa; Portuguese Economy Ministry) estimate short- and long-run elasticities of private consumption for fiscal instruments. They find that positive tax revenue elasticities indicate that consumers have a Ricardian behaviour, while social benefits appear to have a non-Keynesian effect on private consumption. Private consumption continues to exhibit a non-Keynesian response to tax increases, and other expenditures have a recessive impact during normal times. After the launch of the EMU, expansionary fiscal consolidations became harder to observe.