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Macroeconomic effects of fiscal consolidation on economic activity in SSA countries

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  • Woldu, Gabriel Temesgen
  • Szakálné Kanó, Izabella

Abstract

This paper studies the effects of fiscal measures in 40 sub-Saharan countries on economic output, unemployment, consumption, private investment, REER, and current account balance. The study estimates impulse response functions with local projections, based on a yearly dataset covering 40 countries over 2000–2019. The key variable in the dataset is a measure of fiscal stance computed following Blanchard (1993), with a threshold of 1.5%. The study finds that in the short run, fiscal consolidation reduces real GDP and private demand. In addition, the current account balance responds positively to a shock in fiscal consolidation, whereas the real effective exchange rate responds negatively. Moreover, compared with revenue-based consolidations, spending-based consolidations lead to smaller losses in output. Our finding also reveals that fiscal consolidations also depend on economic cycles, with a lower output loss during an economic boom. Finally, this study suggests that fiscal consolidations should be carried out based on spending-based consolidations and have to be preceded by an economic boom.

Suggested Citation

  • Woldu, Gabriel Temesgen & Szakálné Kanó, Izabella, 2023. "Macroeconomic effects of fiscal consolidation on economic activity in SSA countries," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    • Handle: RePEc:eee:joecas:v:28:y:2023:i:c:s1703494923000245
    DOI: 10.1016/j.jeca.2023.e00312
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    More about this item

    Keywords

    Cyclically adjusted primary balance; Fiscal consolidation; Local projection method; Sub-Sahara African countries;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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