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The Cost of Fiscal Retrenchment Revisited : How Strong is the Evidence?

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Author Info
Philippine Cour
Eric Dubois
Selma Mahfouz
Jean Pisani-Ferry

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Abstract

The impact of government deficits on growth has been, for long, the object of a controversy between the Keynesians, for whom an ex ante reduction of the government deficit has negative impacts on growth (at least in the medium-term), and neo- classical economists, for whom activity is entirely determined by supply, so that government deficits do not have any effect on activity. The Danish experience of 1983 - 1986 and the Irish experience of 1986 - 1989, during which drastic reductions in the government deficits did not involve significant output losses, have led to theoretical models being proposed which build a bridge between these two antagonistic approaches. According to these models, the economy would be rather Keynesian in normal times, but "anti-Keynesian" in a period of budgetary crisis.

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Paper provided by CEPII research center in its series Working Papers with number 1996-16.

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Date of creation: Dec 1996
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Handle: RePEc:cii:cepidt:1996-16

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Related research
Keywords: fiscal policy; consumption; model;

Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - General

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  1. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
  3. Alan Sutherland, . "Fiscal Crises and Aggregate Demand: Can High Public Debt Reverse the Effects of Fiscal Policy?," Discussion Papers 95/17, Department of Economics, University of York.
    Other versions:
  4. Bertola, Giuseppe & Drazen, Allan, 1993. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," American Economic Review, American Economic Association, vol. 83(1), pages 11-26, March. [Downloadable!] (restricted)
    Other versions:
  5. Steven A. Symansky & Leonardo Bartolini & Assaf Razin, 1995. "Fiscal Restructuring in the Group of Seven Major Industrial Countries in the 1990s: Macroeconomic Effects," IMF Working Papers 95/35, International Monetary Fund.
  6. Giavazzi, Francesco & Pagano, Marco, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," CEPR Discussion Papers 1284, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March. [Downloadable!] (restricted)
  8. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD, Economics Department. [Downloadable!]
  9. Alesina, A. & Perotti, R., 1995. "Fiscal Expansions and Adjustments in OECD Countries," Discussion Papers 1995_25, Columbia University, Department of Economics.
  10. Hughes Hallett, Andrew & McAdam, Peter, 1996. "Fiscal Deficit Reductions in Line with the Maastricht Criteria for Monetary Union: An Empirical Analysis," CEPR Discussion Papers 1351, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Jean-Claude Chouraqui & Robert P. Hagemann & Nicola Sartor, 1990. "Indicators of Fiscal Policy: A Re-Examination," OECD Economics Department Working Papers 78, OECD, Economics Department. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bayar, Ali H., 1999. "Entry and Exit Dynamics of 'Excessive Deficits' in the European Union," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. António Afonso, 2007. "Expansionary fiscal consolidations in Europe: part of conventional wisdom?," Money Macro and Finance (MMF) Research Group Conference 2006 50, Money Macro and Finance Research Group. [Downloadable!]
  3. Gabriele Giudice & Alessandro Turrini & Jan in’t Veld, 2007. "Non-Keynesian Fiscal Adjustments? A Close Look at Expansionary Fiscal Consolidations in the EU," Open Economies Review, Springer, vol. 18(5), pages 613-630, November. [Downloadable!] (restricted)
  4. António Afonso, 2006. "Expansionary fiscal consolidations in Europe - new evidence," Working Paper Series 675, European Central Bank. [Downloadable!]
    Other versions:
  5. Jerome Creel, 1998. "L'assainissement budgétaire au Danemark entre 1983 et 1986 : l'anti-mythe (in French)," Documents de Travail de l'OFCE 1998-02, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  6. Carlos Mulas-Granados & Emanuele Baldacci & Benedict J. Clements & Sanjeev Gupta, 2004. "Front-Loaded or Back-Loaded Fiscal Adjustments: What Works in Emerging Market Economies?," IMF Working Papers 04/157, International Monetary Fund. [Downloadable!]
  7. Carlos Mulas-Granados, 2003. "The Trade-Off between Growth & Equality and the Economic Impact of Alternative Fiscal Adjustment Strategies in the EU," European Economy Group Working Papers 20, European Economy Group. [Downloadable!]
  8. Canale, Rosaria Rita & Foresti, Pasquale & Marani, Ugo & Napolitano, Oreste, 2007. "On Keynesian effects of (apparent) non-Keynesian fiscal policies," MPRA Paper 3742, University Library of Munich, Germany, revised Jun 2007. [Downloadable!]
    Other versions:
  9. Carlos Mulas-Granados, 2005. "Fiscal Adjustments and the Short-Term Trade-Off between economic growth and equality," Hacienda Pública Española, IEF, vol. 172(1), pages 61-92, June. [Downloadable!]
  10. Ali Bayar & Bram Smeets, 2009. "Government Deficits in the European Union: An Analysis of Entry and Exit Dynamics," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. António Afonso, 2001. "Non-Keynesian Effects of Fiscal Policy in the EU-15," Working Papers 2001/07, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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