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When Are Fiscal Contractions Successful? Lessons for Countries Within and Outside the EMU

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  • Hjelm, Göran

    ()
    (National Institute of Economic Research)

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    Abstract

    In the past 25 years, many OECD countries have implemented fiscal contractions to strengthen their public finances. The macroeconomic outcomes of these efforts have varied. With the aid of an econometric model, this paper seeks to identify the factors that make contractions successful from a macroeconomic standpoint. The findings suggest, among other things, that favorable changes in the real exchange rate prior to the period of fiscal contraction and in the real quantity of money during this period play an important part in the macroeconomic outcome. This indicates in turn that it may be more difficult to implement successful fiscal contractions within the EMU. The findings also show that the composition of the contraction in regard to the relative proportions of tax increases and expenditure cutbacks, respectively, is probably less important than has usually been assumed.

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    Bibliographic Info

    Paper provided by National Institute of Economic Research in its series Working Paper with number 92.

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    Length: 27 pages
    Date of creation: 16 Jun 2004
    Date of revision:
    Publication status: Published in Journal of Post Keynesian Economics, 2007, pages 327-358.
    Handle: RePEc:hhs:nierwp:0092

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    Keywords: Fiscal Contractions; Fiscal Policy; Real Exchange Rate; EMU;

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    1. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1251-71, November.
    2. Ardagna, Silvia & Alesina, Alberto, 1998. "Tales of Fiscal Adjustment," Scholarly Articles 2579822, Harvard University Department of Economics.
    3. Bertola, Giuseppe & Drazen, Allan, 1991. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," CEPR Discussion Papers 599, C.E.P.R. Discussion Papers.
    4. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries," IMF Working Papers 96/70, International Monetary Fund.
    5. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," NBER Working Papers 5730, National Bureau of Economic Research, Inc.
    6. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries," NBER Working Papers 3372, National Bureau of Economic Research, Inc.
    7. Hjelm, Goran, 2002. "Is private consumption growth higher (lower) during periods of fiscal contractions (expansions)?," Journal of Macroeconomics, Elsevier, vol. 24(1), pages 17-39, March.
    8. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(4), pages 1399-1436, November.
    9. Davidson, Russell & MacKinnon, James G., 1989. "Testing for Consistency using Artificial Regressions," Econometric Theory, Cambridge University Press, vol. 5(03), pages 363-384, December.
    10. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
    11. Hjelm, Goran, 2002. " Effects of Fiscal Contractions: The Importance of Preceding Exchange Rate Movements," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 423-41, September.
    12. Alberto Alesina & Silvia Ardagna, 1998. "Tales of fiscal adjustment," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(27), pages 487-545, October.
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