The Inverted Haavelmo Effect and the Effects of Fiscal Policies in the United States, the United Kingdom, Germany and the Netherlands

  • Anthonie Knoester
Part of the Confederation of European Economic Associations Conference Volumes book series (CEEA)


Taxation can have a major impact on economic growth, by the working of the inverted Haavelmo effect. This is the occurrence of a negative balanced-budget multiplier instead of a positive Keynesian one, as a result of simultaneous increase in public spending and taxation. Then the result of an expanding public sector, financed by extra taxes and/or social security contributions, will be a lower rate of economic growth and less employment than in the absence of such expansion. This chapter focuses on the policy implications of the inverted Haavelmo effect. First, the background of the inverted Haavelmo effect will be discussed briefly. Next, the effects of the actual increase of public spending and taxation in the 1970s and 1980s will be analysed for Germany, the Netherlands, the United Kingdom and the United States. Section 5.4 deals with the economic consequences of the Kohl, Lubbers, Thatcher and Reagan administrations. The chapter ends with a section in which some policy recommendations for the 1990s are drawn.


Income Distribution OECD Country Fiscal Policy Real Wage Public Spending 
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© Confederation of European Economic Associations 1993

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  • Anthonie Knoester

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