Crowding In of Private Spending

Impact of Expectations on Fiscal Stimulus

The Role of Credibility in Fiscal Policy Announcements

A government announces a one-time tax rebate for all households to stimulate the economy. Simultaneously, credible government sources signal that taxes will need to be raised significantly in the following year to address the budget deficit caused by the rebate. How will this combination of actions most likely influence the size of the fiscal multiplier associated with the tax rebate?

Expectations and Fiscal Policy Effectiveness

If households and firms anticipate that a current government spending increase will be followed by future tax hikes to balance the budget, the immediate effect of the spending multiplier will likely be larger than if no future tax hikes were expected.