On the Identification and Macroeconomic Effects of Discretionary Changes in Fiscal Policy
AbstractEmpirical studies on the effects of fiscal adjustments apply different approaches to identify discretionary changes in fiscal policy. While the results of one strand of literature suggest that the effects of fiscal adjustments on GDP are small or even positive, particularly for spending cuts (expansionary austerity), this strand of literature is under criticism because of an incomplete cyclical adjustment strategy. I compare the macroeconomic effects of fiscal adjustments using five different identification strategies for a panel of 30 OECD countries over the period 1980 to 2012 and show that the strategy chosen for identifying fiscal policy has a crucial impact on the estimated effects. My results suggest that large fiscal adjustments (both revenue and spending based) lead to economic contractions, after appropriate controlling for cyclical effects and one-off capital transfers. These findings indicate that a great deal of previous empirical research on fiscal adjustments and expansionary austerity is based on an incomplete measure of fiscal policy and needs to be reevaluated.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 52056.
Date of creation: 15 Aug 2013
Date of revision: 22 Nov 2013
Fiscal Policy · Cyclical Adjustment · Government Expenditures;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
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