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Fiscal Policy Rule, Expectation and Private Consumption-From the Perspective of Business Cycles
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TitleFiscal Policy Rule, Expectation and Private Consumption-From the Perspective of Business Cycles  
AuthorHu Yonggang and Guo Changlin  
OrganizationSchool of Economics, Shanghai University of Finance and Economics, 
Key WordsFiscal Policy Rule;Expectation;Private Consumption;Policy Coordination 
AbstractWhen the economy has large fluctuations, the government will use fiscal policy to stabilize it, it is just the case in China. By introducing a fiscal policy rule targeting output and inflation into a DSGE model with price rigidity, this paper analyzes the effect of fiscal policy on private consumption. The results suggest that under a feedback rule, fiscal policy can affect consumption through two channels: wealth effect and expectation effect. The magnitude of expectation effect depends on the response of fiscal policy to output and inflation. Specifically, expectation effect become significant when the response is large enough but not too large. More importantly, for the two targeting variables, output and inflation rate, fiscal policy mainly responds to the former, and monetary policy responds to the later. With the guidance of above theoretical results, we also analyze the effects of government spending empirically. Based on the quarterly data during 1996Q1 and 2011Q4, we find that the fiscal policy rule can be uncovered from the data and the government spending has positive effect on private consumption while the expectation effect plays an important role. 
Serial NumberWP330 
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