Anticipated fiscal contraction: the economic consequences of the announcement of Gramm-Rudman-Hollings

The announcement of a plan to cut the U.S. federal budget deficit through the Gramm-Rudman-Hollings legislation provides an excellent opportunity to examine the influence of expectations on economic behavior. This paper presents a small forward-looking macroeconomic model and simulates the effects of the announcement of a multistaged reduction in the fiscal deficit. Open and closed economy specifications are compared and contrasted to highlight the importance of international transmission mechanisms in macroeconomic adjustment. The results of the simulations are compared with the stylized facts of the U.S. macroeconomy over the period surrounding the passage of the Gramm-Rudman-Hollings legislation.