The purpose of this study is twofold, based on the macroeconomic and microeconomic analysis. On the one hand, it is attempted to interpret and analyze the effects of fiscal consolidation in the countries-members of Eurozone while at the same time consumer behavior regarding current economic policy is estimated. On the other hand the research’s focus is on consumer behavior regarding specific categories of consumption. The interpretation of the effects of austerity measures in Greece during the period 2010-2011 is one of a high interest. The question of the research hypothesis is based on two fundamental theories about fiscal policy; the Keynesian and Ricardian theory. According to the first theory, a tax cut or an increase in government spending, results to higher income and higher consumption. Keynesian model is also the base of the theory of twin deficits. A fiscal expansion leads simultaneously to the deterioration of the current account deficit (CA). On the contrary, the proponents of Ricardian Equivalence Theorem claim that the aforementioned economic policies lead to an increase in private savings (precautionary savings). Consumers predict the government’s future fiscal adjustment in order to reduce deficits; thus they do not perceive the reduction of the taxes as additional income.As regard to the macroeconomic analysis, the econometric methodology of fixed-effects estimators and Arrelano-Bond models was investigated and based on country data from 12 Eurozone countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain). According to the results, fiscal adjustment has led to a decline in private consumption. More specifically, empirical research found that a high fiscal consolidation (above 2.5% of structural deficit) leads to a higher drop in private consumption. Especially for Greece, the impact of austerity has led to a higher drop in private consumption. The results of this research support Keynesian theory, confirming additionally the negative relationship between the volatility of government revenues and the growth of individual consumption. Furthermore, unemployment rate is negatively related to growth of individual consumption.As far as microeconomic analysis is concerned, the aim of this thesis is to identify the factors that influence consumers’ behavior regarding to private saving, consumers’ response to the first package of austerity measures in Greece and the level of consumption for food, heating and entertainment. In order to achieve this goal, we used a sample of 800 consumers from Athens and Crete. A questionnaire was distributed during the period August-November 2011. Previous studies on consumer’s behavior were used for the preparation of the questionnaire and the methodological approach. Moreover, Ordinary Least Square (OLS), Logit models, Ordered-Logit models, Tobit models and Quantile regressions were used.Generally, a high drop in private consumption is revealed. This result is supported on a macro and micro-economic level. Simultaneously, austerity measures have led consumers to save less. The study of consumer behavior is a valuable basis for the adoption and implementation of an effective policy in order to stimulate economic recovery.
Can public spending boost private consumption?