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Fiscal Consolidations and Growth: Does Speed Matter?

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  • Steven Pennings
  • Esther Pérez Ruiz
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    Abstract

    Should fiscal consolidations be front-loaded or proceed at a more steady pace, and how does this affect growth? We make an attempt to address this question using a three-step methodology. First, we modify a standard regression of growth on consolidation size to allow speed to affect the multiplier. Second, using the narrative dataset of Devries and others (2011), we construct a new sample of multi-year consolidation episodes for 17 advanced economies over 1978-2009. Third, we develop a novel concept of speed to measure the pace of the consolidation episodes identified in the data. The main empirical finding is that fast episodes have higher multipliers than gradual consolidations. This provides some preliminary support for consolidating at a steady pace, market access and a credible adjustment plan permitting. However, as the sample size is small, identifying mechanisms and testing robustness is difficult, and so our findings should not be interpreted causally.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/230.

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    Length: 25
    Date of creation: 11 Nov 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/230

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    Related research

    Keywords: Fiscal consolidation; Economic growth; Government expenditures; Developed countries; Time series; Economic models; Fiscal policy; fiscal multipliers; anticipation effects; government spending; fiscal consolidations; fiscal adjustment; fiscal rules; spending cuts; fiscal contractions; budget surplus; fiscal consolidation on growth; fiscal efforts; taxation; increase in consumption; fiscal retrenchments; tax cuts; aggregate demand; budget measures; fiscal balances; fiscal changes; fiscal shock; tax changes; public debt; fiscal model; public expenditures; size of multipliers; fiscal years; fiscal shocks;

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    1. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," CEP Discussion Papers, Centre for Economic Performance, LSE dp1016, Centre for Economic Performance, LSE.
    2. Roberto Perotti, 2011. "The "Austerity Myth": Gain Without Pain?," NBER Working Papers 17571, National Bureau of Economic Research, Inc.
    3. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(1), pages 54-79, January.
    4. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of two Small Euopean Countries," Working Papers 89, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics, Boston College Department of Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
    6. Alan J. Auerbach & Yuriy Gorodnichenko, 2014. "Fiscal Multipliers in Japan," NBER Working Papers 19911, National Bureau of Economic Research, Inc.
    7. Giovanni Callegari & Giovanni Melina & Nicoletta Batini, 2012. "Successful Austerity in the United States, Europe and Japan," IMF Working Papers 12/190, International Monetary Fund.
    8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(1), pages 1-45, February.
    9. Stephanie Schmitt-Grohé & Martin Uríbe, 2011. "Pegs and Pain," NBER Working Papers 16847, National Bureau of Economic Research, Inc.
    10. Nina Budina & Andrea Schaechter & Anke Weber & Tidiane Kinda, 2012. "Fiscal Rules in Response to the Crisis," IMF Working Papers 12/187, International Monetary Fund.
    11. Anja Baum & Marcos Poplawski-Ribeiro & Anke Weber, 2012. "Fiscal Multipliers and the State of the Economy," IMF Working Papers 12/286, International Monetary Fund.
    12. Daniel Leigh & Andrea Pescatori & Jaime Guajardo, 2011. "Expansionary Austerity New International Evidence," IMF Working Papers 11/158, International Monetary Fund.
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