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How do fiscal adjustments work? An empirical investigation

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  • Karamysheva, Madina

Abstract

Recent empirical evidence suggests that fiscal consolidation based mainly on tax hikes has a more recessionary impact on economic growth than that based on expenditure cuts. This paper evaluates the effects of fiscal adjustment plans identified through the narrative approach on the U.S. macroeconomic activity. To do so, I incorporate fiscal plans into a vector autoregression model to investigate transmission channels of fiscal consolidation and accompanying policy. I check whether monetary policy, uncertainty, or financial markets can explain the heterogeneous effects of fiscal adjustment plans. I find that the financial market and macro uncertainty channels are the most important ones.

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  • Karamysheva, Madina, 2022. "How do fiscal adjustments work? An empirical investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
  • Handle: RePEc:eee:dyncon:v:137:y:2022:i:c:s0165188922000525
    DOI: 10.1016/j.jedc.2022.104347
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