Consumer sentiment and countercyclical fiscal policies

We re-explore the consequences of some popular countercyclical intervention rules in a simple Keynesian-type macroeconomic model in which the dynamics of consumer sentiment and business cycles are intertwined. We find that fiscal policy does not only have a direct effect on national income via the well-known Keynesian multiplier process but also an indirect effect by affecting consumer sentiment. The good news is that the indirect effect may amplify the direct effect and therefore increases a policy-maker's impact on national income. However, the bad news is that due to the interactions between the business cycle and the evolution of consumer sentiment, the stabilization of national income is an intricate matter.