believe that the fiscal tightening generates a change in regime that "eliminates the need for larger, maybe much more disruptive adjustments in the future" ... Current increases in taxes and/or spending cuts perceived as permanent, by removing the danger of sharper and more costly fiscal adjustments in the future, generate a positive wealth effect. An additional channel through which current fiscal policy can influence the economy via its effect on agents' expectations is the interest rate. If agents believe that the stabilization is credible and avoids a default on government debt, they can ask for a lower premium on government bonds. Private demand components sensitive to the real interest rate can increase if the reduction in the interest rate paid on government bonds leads to a reduction in the real interest rate charged to consumers and firms ... The decrease in interest rate can also lead to the appreciation of stocks and bonds, increasing agents' financial wealth, and triggering a consumption/investment boom. On the supply side, expansionary effects of fiscal adjustments work via the labor market and via the effect that tax increases and/or spending cuts have on the individual labor supply in a neoclassical model, and on the unions' fall-back position in imperfectly competitive labor markets. First, households are alleged to have an advanced understanding of the way the economy works and the future fiscal policy settings. All the evidence from behavioural economics tells us they do not have that understanding nor behave in the "rational" way that is