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Expansionary Austerity New International Evidence

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Author Info

  • Daniel Leigh
  • Andrea Pescatori
  • Jaime Guajardo

Abstract

This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine the historical record, including Budget Speeches and IMFdocuments, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/158.

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Length: 40
Date of creation: 01 Jul 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/158

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Keywords: Taxation; Fiscal consolidation; OECD; Sovereign debt; fiscal policy; statistic; fiscal consolidations; equation; surveys; budget deficit; standard error; government spending; fiscal adjustments; spending cuts; budgetary impact; fiscal balance; expansionary fiscal; fiscal contractions; outliers; fiscal variables; tax changes; expansionary fiscal contractions; fiscal data; government deficit; correlation; tax revenues; tax rates; fiscal policy adjustments; government revenue; fiscal actions; fiscal stimulus; fiscal adjustment; logarithm; fiscal tightening; fiscal measures; tax revenue; statistical significance; probability; fiscal indicators; fiscal accounts; samples; tax cuts; fiscal retrenchments; fiscal expansions; instrumental variable; aggregate demand; government expenditure; regression equation; statistics; fiscal multipliers; fiscal stance; tax cut; fiscal position; horizontal axis; fiscal package; sample size; expenditure restraint; fiscal discipline; fiscal budget; fiscal developments; tax increases; budgetary impacts; tax policy; standard deviation; expansionary fiscal consolidations; discretionary fiscal policy; correlations; survey; fiscal stimulus package; budget multiplier; tax burden; government spending shocks; fiscal policy actions; discretionary fiscal stimulus; independent variable; explanatory power; expansionary fiscal contraction; budget balance; budget deficits; fiscal retrenchment; fiscal shocks; fiscal balance in percent; tax reforms; fiscal contraction; fiscal deficit; public spending; fiscal framework; equations; measurement error; time series; standard errors;

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References

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  1. Francesco Giavazzi & Marco Pagano, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," NBER Working Papers 5332, National Bureau of Economic Research, Inc.
  2. Barry Eichengreen & Ashoka Mody, 2004. "Do Collective Action Clauses Raise Borrowing Costs?," Economic Journal, Royal Economic Society, vol. 114(495), pages 247-264, 04.
  3. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
  4. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  5. Robert J. Barro & Charles J. Redlick, 2011. "Macroeconomic Effects From Government Purchases and Taxes," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 51-102.
  6. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
  7. Wolswijk, Guido, 2007. "Short- and long-run tax elasticities: the case of the Netherlands," Working Paper Series 0763, European Central Bank.
  8. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
  9. Andrea Bubula & Inci Ötker, 2002. "The Evolution of Exchange Rate Regimes Since 1990," IMF Working Papers 02/155, International Monetary Fund.
  10. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  11. John Bluedorn & Daniel Leigh, 2011. "Revisiting the Twin Deficits Hypothesis: The Effect of Fiscal Consolidation on the Current Account," IMF Economic Review, Palgrave Macmillan, vol. 59(4), pages 582-602, November.
  12. Lutz Kilian & Robert Vigfusson, 2009. "Pitfalls in estimating asymmetric effects of energy price shocks," International Finance Discussion Papers 970, Board of Governors of the Federal Reserve System (U.S.).
  13. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  14. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," CEP Discussion Papers dp1016, Centre for Economic Performance, LSE.
  15. Christina D. Romer & David H. Romer, 2003. "A New Measure of Monetary Shocks: Derivation and Implications," NBER Working Papers 9866, National Bureau of Economic Research, Inc.
  16. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  17. Olivier Coibion, 2011. "Are the Effects of Monetary Policy Shocks Big or Small?," NBER Working Papers 17034, National Bureau of Economic Research, Inc.
  18. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2008. "The Effects of Public Spending Shocks on Trade Balances and Budget Deficits in the European Union," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 414-423, 04-05.
  19. James Cloyne, 2011. "What are the Effects of Tax Changes in the United Kingdom? New Evidence from a Narrative Evaluation," CESifo Working Paper Series 3433, CESifo Group Munich.
  20. Peter Isard & Hamid Faruqee, 1998. "Exchange Rate Assessment," IMF Occasional Papers 167, International Monetary Fund.
  21. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  22. repec:fth:coluec:754 is not listed on IDEAS
  23. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
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  1. The stimulus debate revisited
    by Vuk Vukovic in Don't worry, I'm an economist on 2012-03-11 23:50:00
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