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Are Fiscal Adjustments Contractionary?

Author Info

Listed author(s):
  • Christoph A. Schaltegger
  • Martin Weder

Abstract

This paper analyzes the short-term effects of fiscal adjustments on macroeconomic aggregates for a panel of 20 OECD countries during 1970--2008. We find that episodes of budget consolidation have an insignificant impact on growth and consumption. On the other hand, fiscal adjustments are associated with a significant boost in private investment, particularly when they are large and expenditure-based. This paper thus provides further evidence for the expectational view of fiscal policy according to which successful attempts by the government to reduce the deficit lead to lower risk premiums and interest rates, thereby crowding in private investment.

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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 68 (2012)
Issue (Month): 4 (December)
Pages: 335-364

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201212)68:4_335:afac_2.0.tx_2-t
DOI: 10.1628/001522108X659529
Contact details of provider: Web page: https://www.mohr.de/fa

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Keywords: fiscal policy; fiscal adjustment; non-Keynesian effects; investment;

Find related papers by JEL classification:

  • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
  • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
  • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

References listed on IDEAS
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  1. Alesina, Alberto Francesco & Perotti, Roberto & Tavares, Jose, 1998. "The Political Economy of Fiscal Adjustments," Scholarly Articles 12553724, Harvard University Department of Economics.
  2. Ardagna, Silvia, 2009. "Financial Markets’ Behavior Around Episodes of Large Changes in the Fiscal Stance," Scholarly Articles 2579824, Harvard University Department of Economics.
  3. Alberto Alesina & Roberto Perotti & José Tavares, 1998. "The Political Economy of Fiscal Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 197-266.
  4. António Afonso, 2010. "Expansionary fiscal consolidations in Europe: new evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 17(2), pages 105-109, January.
  5. Ardagna, Silvia, 2004. "Fiscal Stabilizations: When Do They Work and Why," Scholarly Articles 2580047, Harvard University Department of Economics.
  6. Bertola, Giuseppe & Drazen, Allan, 1993. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," American Economic Review, American Economic Association, vol. 83(1), pages 11-26, March.
  7. 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.
  8. Perotti, Roberto & Kontopoulos, Yianos, 2002. "Fragmented fiscal policy," Journal of Public Economics, Elsevier, vol. 86(2), pages 191-222, November.
  9. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2002. "Fiscal Policy, Profits, and Investment," American Economic Review, American Economic Association, vol. 92(3), pages 571-589, June.
  10. Josep Lluís Carrion-i-Silvestre & Tomás del Barrio-Castro & Enrique López-Bazo, 2005. "Breaking the panels: An application to the GDP per capita," Econometrics Journal, Royal Economic Society, vol. 8(2), pages 159-175, 07.
  11. Alberto Alesina & Carlo Ambrogio Favero & Francesco Giavazzi, 2012. "The output effect of fiscal consolidations," Working Papers 450, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  12. Alesina, Alberto Francesco & Ardagna, Silvia, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," Scholarly Articles 22801844, Harvard University Department of Economics.
  13. Alberto Alesina & Silvia Ardagna, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," NBER Chapters,in: Tax Policy and the Economy, Volume 24, pages 35-68 National Bureau of Economic Research, Inc.
  14. António Afonso & João Tovar Jalles, 2012. "Measuring the success of fiscal consolidations," Applied Financial Economics, Taylor & Francis Journals, vol. 22(13), pages 1053-1061, July.
  15. Ardagna, Silvia, 2009. "Financial markets' behavior around episodes of large changes in the fiscal stance," European Economic Review, Elsevier, vol. 53(1), pages 37-55, January.
  16. Ardagna, Silvia, 2004. "Fiscal stabilizations: When do they work and why," European Economic Review, Elsevier, vol. 48(5), pages 1047-1074, October.
  17. Abdur Chowdhury & George Mavrotas, 2006. "FDI and Growth: What Causes What?," The World Economy, Wiley Blackwell, vol. 29(1), pages 9-19, 01.
  18. repec:hrv:faseco:3353756 is not listed on IDEAS
  19. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
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Cited by:

  1. Schaltegger, Christoph A. & Weder, Martin, 2014. "Austerity, inequality and politics," European Journal of Political Economy, Elsevier, vol. 35(C), pages 1-22.
  2. Christoph A. Schaltegger & Martin Weder, 2013. "Will Europe Face A Lost Decade? A Comparison With Japan's Economic Crisis," CREMA Working Paper Series 2013-03, Center for Research in Economics, Management and the Arts (CREMA).

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