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Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects

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  • Alberto Alesina
  • Roberto Perotti

Abstract

This ppaer studies how the composition of fiscal adjustments influences their likelihood of success, defined as a long lasting deficit reduction, and their macroeconomic consequences. We find that fiscal adjustments which rely primarily on spending cuts on transfers and the government wage bill have a better chance of being successful and are expansionary. On the contrary fiscal adjustments which rely primarily on tax increases and cuts in public investment tend not to last and are contractionary. We discuss alternate explanations for these findings by studying both a full sample of OECD countries and by focusing on three case studies: Denmark, Ireland and Italy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5730.

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Date of creation: Aug 1996
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Publication status: published as Alesina, Alberto and Roberto Perotti. "Fiscal Adjustments In OECD Countries: Composition And Macroeconomic Effects," International Monetary Fund Staff Papers, 1997, v44(2,Jun), 210-248.
Handle: RePEc:nbr:nberwo:5730

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  1. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles, Harvard University Department of Economics 3451294, Harvard University Department of Economics.
  2. Bertola, Giuseppe & Drazen, Allan, 1991. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 599, C.E.P.R. Discussion Papers.
  3. Allan Drazen & Vittorio Grilli, 1990. "The Benefits of Crises for Economic Reforms," NBER Working Papers, National Bureau of Economic Research, Inc 3527, National Bureau of Economic Research, Inc.
  4. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 3-91, Wharton School Rodney L. White Center for Financial Research.
  5. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers, Tel Aviv - the Sackler Institute of Economic Studies 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  6. Nouriel Roubini & Jeffrey Sachs, 1988. "Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies," NBER Working Papers, National Bureau of Economic Research, Inc 2682, National Bureau of Economic Research, Inc.
  7. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(2), pages 223-47, April.
  8. Perotti, Roberto, 1996. "Fiscal Consolidation in Europe: Composition Matters," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 105-10, May.
  9. Baxter, M., 1992. "Financial Market Linkages and the International Transmission of Fiscal Policy," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 336, University of Rochester - Center for Economic Research (RCER).
  10. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, Elsevier, vol. 33(5), pages 903-933, May.
  11. Sutherland, Alan, 1997. "Fiscal crises and aggregate demand: can high public debt reverse the effects of fiscal policy?," Journal of Public Economics, Elsevier, Elsevier, vol. 65(2), pages 147-162, August.
  12. Rudiger Dornbusch, 1988. "Credibility, Debt and Unemployment: Ireland's Failed Stabilization," NBER Working Papers, National Bureau of Economic Research, Inc 2785, National Bureau of Economic Research, Inc.
  13. Ludger Schuknecht & Vito Tanzi, 1995. "The Growth of Government and the Reform of the State in Industrial Countries," IMF Working Papers, International Monetary Fund 95/130, International Monetary Fund.
  14. Jean-Claude Chouraqui & Robert P. Hagemann & Nicola Sartor, 1990. "Indicators of Fiscal Policy: A Re-Examination," OECD Economics Department Working Papers, OECD Publishing 78, OECD Publishing.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Does UK Double-Dip Prove that Austerity DoesnÂ’t Work?
    by Matt Mitchell in Neighborhood Effects on 2012-04-26 14:28:22
  2. Can a reduction in government spending stimulate the economy?
    by Matt Mitchell in Neighborhood Effects on 2010-11-15 17:25:01
  3. The Impact of Spending Cuts on the Economy
    by Veronique de Rugy in The Corner on 2011-02-25 14:55:00
  4. The case for Mr Osborne's austerity
    by ? in BBC NEWS | Stephanomics on 2010-09-07 09:45:25
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