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Are Fiscal Adjustments Contractionary?

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  • Christoph A. Schaltegger
  • Martin Weder

Abstract

This paper analyzes the short-term effects of fiscal adjustments on macroeconomic aggregates for a panel of 20 OECD countries during 1970--2008. We find that episodes of budget consolidation have an insignificant impact on growth and consumption. On the other hand, fiscal adjustments are associated with a significant boost in private investment, particularly when they are large and expenditure-based. This paper thus provides further evidence for the expectational view of fiscal policy according to which successful attempts by the government to reduce the deficit lead to lower risk premiums and interest rates, thereby crowding in private investment.

Suggested Citation

  • Christoph A. Schaltegger & Martin Weder, 2012. "Are Fiscal Adjustments Contractionary?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(4), pages 335-364, December.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201212)68:4_335:afac_2.0.tx_2-t
    DOI: 10.1628/001522108X659529
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    Cited by:

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    2. Christoph A. Schaltegger & Martin Weder, 2013. "Will Europe Face A Lost Decade? A Comparison With Japan's Economic Crisis," CREMA Working Paper Series 2013-03, Center for Research in Economics, Management and the Arts (CREMA).
    3. Schaltegger, Christoph A. & Weder, Martin, 2014. "Austerity, inequality and politics," European Journal of Political Economy, Elsevier, vol. 35(C), pages 1-22.

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    More about this item

    Keywords

    fiscal policy; fiscal adjustment; non-Keynesian effects; investment;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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