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Department of Economics, WU (Wirtschaftsuniversität Wien) Working papers, Department of Economics, WU (Wirtschaftsuniversität Wien)

No 95:
Reasons for the U.S. growth period in the nineties: non-keynesian effects, asset wealth and productivity

Anton Burger () and Martin Zagler ()

Abstract: The 1990s were an extraordinary period for the US economy, both because of declining budget deficits and beginning budget surpluses, as well as for high rates of economic growth. This paper confronts the conventional wisdom that high growth rates caused budget improvements, and claims that budget consolidations also contributed to foster economic growth. We propose the existence of a non-Keynesian effect, where fiscal policy runs in contrast to Keynesian theory and a fiscal consolidation can foster economic growth. We present empirical evidence that an increase in tax revenues reduces the distortionary bias of future taxation and therefore leads to an increase in consumer confidence and consumption. Two supply side effects were proposed. A reduction in transfers reduced labor market pressures and government savings provided liquidity for financial markets which both increased incentives to invest.

JEL-Codes: H30; H31; E60; E62; (follow links to similar papers)

August 2007

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