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CONSUMERS’ UPDATING, POLICY SHOCKS, AND PUBLIC DEBT: AN EMPIRICAL ASSESSMENT OF STATE DEPENDENCIES

Published online by Cambridge University Press:  21 September 2021

Martin Geiger  and
Marios Zachariadis
Martin Geiger*
Affiliation:
Liechtenstein Institute and University of Innsbruck
Marios Zachariadis
Affiliation:
University of Cyprus
*
Address correspondence to: Martin Geiger, Liechtenstein Institute, St. Luziweg 2, 9487 Bendern, Liechtenstein. e-mail: martin.geiger@liechtenstein-institut.li. Phone: +423 375 88 49.
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Abstract

We assess the impact of fiscal and monetary policy shocks on US survey-based consumer expectations within states of low and high public debt. Following an unexpected increase in government spending, consumption intentions rise in the low-debt state and fall in the high-debt state. Overall, such a shock has adverse effects on expectations in high-debt states. Similarly, contractionary monetary policy shocks induce pessimistic expectations in the high-debt state but not in the low-debt state. The estimated responses suggest that higher public debt fuels considerations regarding its repayment, giving rise to state dependencies in the updating of expectations in response to both fiscal and monetary policy shocks.

Keywords

ExpectationsRational InattentionRicardianFiscal Theory of the Price Level
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 8 , December 2022 , pp. 2104 - 2140
Copyright
© Cambridge University Press 2021

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Footnotes

This paper was originally titled “Assessing Expectations as a Joint Monetary-Fiscal and State-Dependent Phenomenon”. The authors are grateful to Nicoletta Pashourtidou and Johann Scharler for comments and suggestions. The authors have no competing interests to declare. This work was supported by the Austrian National Bank [grant number 18142].

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