IDEAS home Printed from https://ideas.repec.org/p/bis/biswps/553.html
   My bibliography  Save this paper

What drives the short-run costs of fiscal consolidation? Evidence from OECD countries

Author

Listed:
  • Ryan Niladri Banerjee
  • Fabrizio Zampolli

Abstract

In a panel of OECD countries, we investigate the short-term effects of fiscal consolidation on output and employment, and how these vary with the state of the business cycle, monetary policy, the level of public debt, the current account, and the strength of the financial cycle. The estimation makes use of local projection methods and fiscal consolidation shocks identified through the narrative approach. Our main finding is that short-term fiscal multipliers remain for the most part below unity, even in bad states, suggesting that important offsetting factors were at play in past consolidation episodes. In particular, we do not find evidence that fiscal multipliers are above unity when the output gap is negative or monetary policy is tight. Instead, we find evidence of lower than average multipliers when the current account is in deficit and public debt is high (although in the latter case employment costs tend to be larger). One factor found to raise the costs of fiscal consolidation is weak private credit growth. Even in this case, however, point estimates indicate that fiscal multipliers are not larger than one. Our results suggest that fiscal consolidation multipliers are not necessarily, or everywhere, larger than average in the aftermath of the global financial crisis.

Suggested Citation

  • Ryan Niladri Banerjee & Fabrizio Zampolli, 2016. "What drives the short-run costs of fiscal consolidation? Evidence from OECD countries," BIS Working Papers 553, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:553
    as

    Download full text from publisher

    File URL: http://www.bis.org/publ/work553.pdf
    File Function: Full PDF document
    Download Restriction: no

    File URL: http://www.bis.org/publ/work553.htm
    Download Restriction: no

    References listed on IDEAS

    as
    1. repec:nbr:nberch:13342 is not listed on IDEAS
    2. Tobias Cwik & Volker Wieland, 2011. "Keynesian government spending multipliers and spillovers in the euro area," Economic Policy, CEPR;CES;MSH, vol. 26(67), pages 493-549, July.
    3. Mario Alloza, 2014. "Is Fiscal Policy More Effective in Uncertain Times or During Recessions?," Discussion Papers 1631, Centre for Macroeconomics (CFM), revised Oct 2016.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    6. Roberto Perotti, 2012. "The "Austerity Myth": Gain without Pain?," NBER Chapters,in: Fiscal Policy after the Financial Crisis, pages 307-354 National Bureau of Economic Research, Inc.
    7. John Bluedorn & Daniel Leigh, 2011. "Revisiting the Twin Deficits Hypothesis: The Effect of Fiscal Consolidation on the Current Account," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(4), pages 582-602, November.
    8. Riera-Crichton, Daniel & Vegh, Carlos A. & Vuletin, Guillermo, 2015. "Procyclical and countercyclical fiscal multipliers: Evidence from OECD countries," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 15-31.
    9. S. Borağan Aruoba & Pablo Cuba-Borda & Frank Schorfheide, 2012. "Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries," PIER Working Paper Archive 14-035, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 19 Jun 2014.
    10. Bachmann, Rüdiger & Sims, Eric R., 2012. "Confidence and the transmission of government spending shocks," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 235-249.
    11. Michael Woodford, 2011. "Simple Analytics of the Government Expenditure Multiplier," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 1-35, January.
    12. Joshua D. Angrist & Òscar Jordà & Guido Kuersteiner, 2013. "Semiparametric Estimates of Monetary Policy Effects: String Theory Revisited," NBER Working Papers 19355, National Bureau of Economic Research, Inc.
    13. Giancarlo Corsetti & Keith Kuester & André Meier & Gernot J. Müller, 2013. "Sovereign Risk, Fiscal Policy, and Macroeconomic Stability," Economic Journal, Royal Economic Society, vol. 0, pages 99-132, February.
    14. Alesina, Alberto & Favero, Carlo & Giavazzi, Francesco, 2015. "The output effect of fiscal consolidation plans," Journal of International Economics, Elsevier, vol. 96(S1), pages 19-42.
    15. S. Boragan Aruoba & Frank Schorfheide, 2013. "Macroeconomic dynamics near the ZLB: a tale of two equilibria," Working Papers 13-29, Federal Reserve Bank of Philadelphia.
    16. Thorsten Drautzburg & Harald Uhlig, 2015. "Fiscal Stimulus and Distortionary Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 894-920, October.
    17. Aghion, Philippe & Hémous, David & Kharroubi, Enisse, 2014. "Cyclical fiscal policy, credit constraints, and industry growth," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 41-58.
    18. Alesina, Alberto Francesco & Ardagna, Silvia, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," Scholarly Articles 22801844, Harvard University Department of Economics.
    19. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
    20. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    21. Braun, R. Anton & Korber, Lena Mareen & Waki, Yuichiro, 2013. "Small and orthodox fiscal multipliers at the zero lower bound," FRB Atlanta Working Paper 2013-13, Federal Reserve Bank of Atlanta.
    22. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    23. Roberto Perotti, 2011. "The "Austerity Myth": Gain without Pain?," Working Papers 430, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    24. Eric M. Leeper & Todd B. Walker & Shu‐Chun Susan Yang, 2013. "Fiscal Foresight and Information Flows," Econometrica, Econometric Society, vol. 81(3), pages 1115-1145, May.
    25. Matthew Canzoneri & Fabrice Collard & Harris Dellas & Behzad Diba, 2016. "Fiscal Multipliers in Recessions," Economic Journal, Royal Economic Society, vol. 126(590), pages 75-108, February.
    26. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
    27. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
    28. 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.
    29. Giovanni Callegari & Giovanni Melina & Nicoletta Batini, 2012. "Successful Austerity in the United States, Europe and Japan," IMF Working Papers 12/190, International Monetary Fund.
    30. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-685, September.
    31. Perotti, Roberto, 2011. "The "Austerity Myth": Gain without Pain?," CEPR Discussion Papers 8658, C.E.P.R. Discussion Papers.
    32. Robert J. Barro & Charles J. Redlick, 2011. "Macroeconomic Effects From Government Purchases and Taxes," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 51-102.
    33. Roberto Perotti, 2011. "The "Austerity myth": Gain Without Pain?," BIS Working Papers 362, Bank for International Settlements.
    34. Eric Sims & Jonathan Wolff, 2013. "The Output and Welfare Effects of Government Spending Shocks over the Business Cycle," NBER Working Papers 19749, National Bureau of Economic Research, Inc.
    35. Tagkalakis, Athanasios, 2008. "The effects of fiscal policy on consumption in recessions and expansions," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1486-1508, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Carlson, Mark A. & Rose, Jonathan D., 2016. "Can a Bank Run Be Stopped? Government Guarantees and the Run on Continental Illinois," Finance and Economics Discussion Series 2016-3, Board of Governors of the Federal Reserve System (U.S.).
    2. repec:sos:sosjrn:170406 is not listed on IDEAS

    More about this item

    Keywords

    fiscal consolidation; fiscal multipliers; narrative approach; panel data; local projections;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bis:biswps:553. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Beslmeisl). General contact details of provider: http://edirc.repec.org/data/bisssch.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.