BOOSTING CONFIDENCE: IS THERE A ROLE FOR FISCAL POLICY?
University of Macedonia
Bank of Greece
This paper investigates the widely held view that expansionary fiscal policy can boost consumer and business confidence, which will stimulate private spending and sustain economic activity. We find evidence in favor of this conjecture, i.e., cuts in direct taxes generate a positive effect on consumer and business confidence, while the same applies in cases of higher non-wage government consumption. However, higher government wage bills and government investment reduce confidence, possibly because they entail a permanent increase in the size of the public sector, which would have to be financed by higher future taxes.
Keywords: Fiscal Policy, Consumer Confidence, Business Confidence, Fiscal Stimulus of Confidence
JEL Classification: E62, H31, H32
Acknowledgements: We would like to thank Fragiskos Archontakis, Michael Artis, Heather Gibson, Costas Roumanias, Peter Kurrild-Klitgaard, Theo Panagiotidis, William F. Shughart, and Anastasia Theofilakou for helpful discussions and comments. We also would like to thank the Bank of International Settlements for kindly providing the asset price data. The views expressed here are those of the authors and should not be taken to reflect those of Bank of Greece, the European Central Bank or the Eurosystem. The usual disclaimer applies.