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Fiscal Adjustments

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  • Alexander Plekhanov
  • Manmohan S. Kumar
  • Daniel Leigh

Abstract

The paper analyzes the determinants of success of recent fiscal consolidations in the OECD countries as well as the short-run and long-run effects of fiscal adjustments on economic activity by looking at fourteen case studies, panel data for OECD countries, and the results of simulations using a non-Ricardian multi-country dynamic general equilibrium model. The study finds that while fiscal consolidations tend to have short-run contractionary effects, they can be expansionary in the long run, provided that they do not rely excessively on cuts in productive government expenditure. They can also create positive spillover effects for the rest of the world.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/178.

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Length: 38
Date of creation: 01 Jul 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/178

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Related research

Keywords: Fiscal consolidation; Adjustment process; Public debt; Economic models; expenditure; fiscal policy; fiscal consolidations; fiscal adjustment; fiscal adjustments; expenditure cuts; fiscal balance; primary fiscal balance; fiscal deficit; expenditure restraint; capital expenditure; tax rates; tax revenues; tax reforms; tax cuts; tax base; tax increases; tax reform; fiscal space; public finances; fiscal deficits; fiscal tightening; fiscal transparency; fiscal issues; fiscal model; fiscal effort; fiscal stance; tax administration; government spending; fiscal policies; fiscal discipline; expenditure responsibilities; fiscal institutions; fiscal sustainability; fiscal projections; expenditure growth; fiscal rules; taxation; medium-term fiscal framework; government expenditure; prudent fiscal policies; medium-term expenditure framework; fiscal balances; fiscal adjustment effort; expenditure reform; budget deficits; fiscal surpluses; tight fiscal policy; fiscal targets; fiscal multipliers; budget balances; fiscal consolidation episodes; public spending; medium-term expenditure; social security spending; intergovernmental transfers; budget constraint; fiscal expansions; tight fiscal policies; government fiscal deficit; public sector fiscal deficit; fiscal situation; fiscal objectives; fiscal policy objectives; public external debt; aggregate demand; tax increase; composition of expenditure; fiscal consolidation efforts; fiscal reaction; fiscal affairs department; fiscal surplus; subnational fiscal targets; fiscal positions; budget constraints; tax cut; fiscal position; debt service; fiscal stability; fiscal agencies; fiscal costs; budget surplus; fiscal performance; fiscal frameworks; tax burden; foreign debt; public finance; fiscal framework; defense spending; reduction in transfers; tax systems; tax system; fiscal distress; expenditure control; fiscal sustainability analysis; fiscal affairs; mtef; tax income; spending cuts; long-term fiscal sustainability; fiscal studies; budget balance; tax bases;

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References

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  1. von Hagen, Jurgen & Strauch, Rolf R, 2001. " Fiscal Consolidations: Quality, Economic Conditions, and Success," Public Choice, Springer, vol. 109(3-4), pages 327-46, December.
  2. C. John McDermott & Robert F. Wescott, 1996. "An Empirical Analysis of Fiscal Adjustments," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 725-753, December.
  3. Hauptmeier, Sebastian & Heipertz, Martin & Schuknecht, Ludger, 2006. "Expenditure reform in industrialised countries: a case study approach," Working Paper Series 0634, European Central Bank.
  4. Gleich, Holger, 2003. "Budget institutions and fiscal performance in Central and Eastern European countries," Working Paper Series 0215, European Central Bank.
  5. Alt, James E. & Lassen, David Dreyer, 2006. "Fiscal transparency, political parties, and debt in OECD countries," European Economic Review, Elsevier, vol. 50(6), pages 1403-1439, August.
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  7. Shang-Jin Wei & Irina Tytell, 2004. "Does Financial Globalization Induce Better Macroeconomic Policies?," IMF Working Papers 04/84, International Monetary Fund.
  8. Stefania Fabrizio & Ashoka Mody, 2006. "Can budget institutions counteract political indiscipline?," Economic Policy, CEPR & CES & MSH, vol. 21(48), pages 689-739, October.
  9. Lambertini Luisa & Tavares José A, 2005. "Exchange Rates and Fiscal Adjustments: Evidence from the OECD and Implications for the EMU," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-30, December.
  10. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who Adjusts and When? On the Political Economy of Reforms," NBER Working Papers 12049, National Bureau of Economic Research, Inc.
  11. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  12. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
  13. Mark A. Horton & George C. Tsibouris & Wojciech Maliszewski & Mark J Flanagan, 2006. "Experience with Large Fiscal Adjustments," IMF Occasional Papers 246, International Monetary Fund.
  14. Francesco Giavazzi & Tullio Jappelli & Marco Pagano, 2000. "Searching for Non-Linear Effects of Fiscal Policy: Evidence from Industrial and Developing Countries," NBER Working Papers 7460, National Bureau of Economic Research, Inc.
  15. Julia Darby & V. Anton Muscatelli & Graeme Roy, 2004. "Fiscal Consolidation And Decentralisation: A Tale Of Two Tiers," Working Papers 2004_2, Business School - Economics, University of Glasgow.
  16. Douglas Laxton & Michael Kumhof, 2007. "A Party without a Hangover? On the Effects of U.S. Government Deficits," 2007 Meeting Papers 676, Society for Economic Dynamics.
  17. 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.
  18. Taimur Baig & Abdul Abiad, 2005. "Underlying Factors Driving Fiscal Effort in Emerging Market Economies," IMF Working Papers 05/106, International Monetary Fund.
  19. repec:fth:coluec:754 is not listed on IDEAS
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Citations

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Cited by:
  1. Sebastian Dellepiane & Niamh Hardiman, 2012. "The New Politics of Austerity: Fiscal Responses to the Economic Crisis in Ireland and Spain," Working Papers 201207, Geary Institute, University College Dublin.
  2. Luis-Felipe Zanna & Olivier Basdevant & Susan Yang & Geneviève Verdier & Joannes Mongardini & Borislava Mircheva & Dalmacio Benicio, 2011. "The Design of Fiscal Adjustment Strategies in Botswana, Lesotho, Namibia, and Swaziland," IMF Working Papers 11/266, International Monetary Fund.
  3. International Monetary Fund, 2010. "Post-Crisis Fiscal Policy Priorities for the AsEAN-5," IMF Working Papers 10/252, International Monetary Fund.
  4. Athanasios Tagkalakis, 2009. "Fiscal adjustments: do labor and product market institutions matter?," Public Choice, Springer, vol. 139(3), pages 389-411, June.
  5. Sebastian Dellepiane & Niamh Hardiman, 2012. "Fiscal Politics In Time: Pathways to Fiscal Consolidation, 1980-2012," Working Papers 201228, Geary Institute, University College Dublin.
  6. Alberto F. Alesina & Dorian Carloni & Giampaolo Lecce, 2011. "The Electoral Consequences of Large Fiscal Adjustments," NBER Working Papers 17655, National Bureau of Economic Research, Inc.
  7. Papageorgiou, Dimitris, 2012. "Fiscal policy reforms in general equilibrium: The case of Greece," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 504-522.
  8. Niamh Hardiman, 2013. "Rethinking the political economy of fiscal consolidation in two recessions in Ireland," Working Papers 201316, Geary Institute, University College Dublin.
  9. Werner Schule, 2010. "The Potential Contribution of Fiscal Policy to Rebalancing and Growth in New Zealand," IMF Working Papers 10/128, International Monetary Fund.
  10. Salvador Barrios & Sven Langedijk & Lucio Pench, 2010. "EU fiscal consolidation after the financial crisis. Lessons from past experiences," European Economy - Economic Papers 418, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  11. Charles Amo Yartey & Machiko Narita & Garth Peron Nicholls & Joel Chiedu Okwuokei, 2012. "The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean," IMF Working Papers 12/276, International Monetary Fund.
  12. Olivier Basdevant, 2012. "Fiscal Policies and Rules in the Face of Revenue Volatility within Southern Africa Customs Union Countries (SACU)," IMF Working Papers 12/93, International Monetary Fund.

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