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The output effect of fiscal consolidations

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  • Alberto Alesina
  • Carlo Favero
  • Francesco Giavazzi

Abstract

Fiscal consolidations achieved by means of spending cuts are much less costly in terms of output losses than tax-based ones. The difference cannot be explained by accompanying policies, including monetary policy, and it is mainly due to the different response of business confidence and private investment. We obtain these results by studying the effects of the adoption of fiscal consolidation plans (rather than isolated shocks), that is combinations of tax increases and spending cuts, some unanticipated, other anticipated, in a sample of 16 OECD economies..Keywords: fiscal adjustment, output, confidence, investment JEL Classification: H60, E62

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 478.

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Date of creation: 2013
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Handle: RePEc:igi:igierp:478

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