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Endogenous fiscal consolidations

Author Info

Listed author(s):
  • Pablo Hernández de Cos

    ()

    (Banco de España)

  • Enrique Moral-Benito

    ()

    (Banco de España)

Abstract

There is evidence in the literature of fiscal consolidation episodes producing (non-Keynesian) expansionary effects (e.g. Alesina and Ardagna, 1998). We replicate this result for a panel of OECD countries under exogeneity of the fiscal tightening decision, and provide evidence that this decision is endogenous to GDP so that the exogeneity assumption might be inappropriate. Once this endogeneity is taken into consideration, we find that fiscal consolidations have a negative impact on GDP as expected in a Keynesian framework. We also investigate the determinants of successful consolidations. In particular, we use model averaging to overcome the problem of model uncertainty, and conclude that economic recovery and cuts in public wages are the most important ingredients of a consolidation program for successfully reducing budget deficits.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/11/Fich/dt1102e.pdf
File Function: First version, March 2011
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 1102.

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Length: 38 pages
Date of creation: Mar 2011
Handle: RePEc:bde:wpaper:1102
Contact details of provider: Web page: http://www.bde.es/

Web page: http://www.bde.es/bde/en/secciones/informes/Publicaciones_se/docs/
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Keywords: Fiscal consolidation; panel data; endogeneity; model averaging;

Find related papers by JEL classification:

  • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
  • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
  • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

This paper has been announced in the following NEP Reports:

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  1. Moral-Benito, Enrique, 2010. "Model averaging in economics," MPRA Paper 26047, University Library of Munich, Germany.
  2. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The outcome bias
    by chris dillow in Stumbling and Mumbling on 2014-01-02 14:14:17
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Cited by:

  1. Luca Agnello & Ricardo M. Sousa, 2012. "Fiscall Adjustments and Income Inequality:A First Assessment," NIPE Working Papers 19/2012, NIPE - Universidade do Minho.
  2. Òscar Jordà & Alan M. Taylor, 2016. "The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy," Economic Journal, Royal Economic Society, vol. 126(590), pages 219-255, 02.
  3. Szilárd Benk & Zoltán M. Jakab, 2012. "Non-Keynesian Effects of Fiscal Consolidation: An Analysis with an Estimated DSGE Model for the Hungarian Economy," OECD Economics Department Working Papers 945, OECD Publishing.
  4. Luca Agnello & Ricardo M. Sousa, 2011. "Fiscal Consolidation and Income Inequality," NIPE Working Papers 34/2011, NIPE - Universidade do Minho.
  5. Salvatore Dell'Erba & Marcos Poplawski-Ribeiro & Ksenia Koloskova, 2014. "Medium-Term Fiscal Multipliers during Protracted Recessions," IMF Working Papers 14/213, International Monetary Fund.
  6. International Monetary Fund, 2015. "Belgium; Selected Issues," IMF Staff Country Reports 15/71, International Monetary Fund.
  7. David Lodge & Marta Rodriguez-Vives, 2013. "How long can austerity persist? The factors that sustain fiscal consolidations," European Journal of Government and Economics, Europa Grande, vol. 2(1), pages 5-24, June.
  8. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
  9. Yang, Weonho & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Macroeconomic effects of fiscal adjustment: A tale of two approaches," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 31-60.
  10. Munkacsi, Zsuzsa, 2015. "Fiscal austerity, unemployment and family firms," Discussion Papers 06/2015, Deutsche Bundesbank, Research Centre.

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