Fiscal Policy and Aggregate Demand

Abstract

This paper is an investigation of the effects of fiscal policy on private consumption and aggregate demand within an explicit intertemporal optimization framework. Empirical evidence is brought to bear on the following questions: (1) is consumption sensitive to the choice of tax versus debt financing of current government expenditure and (2) to what extent, if any, does government spending directly substitute for private consumer expenditure? The former question has stimulated a considerable amount of research since the Barro (1974) revival of the "Ricardian equivalence " proposi-