Overview
"According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate demand. it has often been argued, however, that this conclusion is misleading as it neglects the role of expectations of future policy : if the fiscal consolidation is read by the private sector as a signal that the share of government spending in GDP is being permanently reduced, households will revise upwards their estimate of their permanent income, and will raise current and planned consumption." (Giavazzi and pagano, 1990)
Critically evaluate the statement above, making sure to summarise the main theoretical and empirical arguments on the effects of multi-year fiscal plans for deficit reduction (austerity policy). Distinguish between expenditure and tax-based approaches.
Write an essay not exceeding 2000 words (including bibliography and appendix) on the question above, without the use of AI. 0% Plagiarism required.