The Macroeconomic Effects of Government Spending Under Fiscal Foresight

Consumption and output responses to fiscal shocks are studied in a model with fiscal foresight. Fiscal foresight reduces both output multipliers and consumption. However, key features such as sticky wages, credit constrained households and elastic labour supply, are able to generate both sizeable output multipliers and positive consumption - in effect preserving key Keynesian effects. This model fits a developing economy like South Africa well since it is able to capture transparent communication of government as well as control for credit constrained consumption and sticky wages.