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Total factor productivity (TFP) and fiscal consolidation: how harmful is austerity?

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  • Ioanna Bardaka

    () (Bank of Greece)

  • Ioannis Bournakis

    (Middlesex University)

  • Georgia Kaplanoglou

    (University of Athens)

Abstract

Departing from the expansionary austerity literature, this study assesses empirically whether fiscal consolidation propagates changes in the supply side of the economy that can potentially influence total factor productivity. Using a panel dataset of 26 OECD countries over the period 1980-2016 and employing panel vector autoregressive and error correction model specifications, we present evidence of both short-run and long-run negative effects of fiscal consolidation on TFP. The short-run impact is disproportionately more damaging for the TFP of low debt countries, while, contrary to the expansionary austerity thesis, our empirical results would advise against spending-driven fiscal consolidation, since such consolidation undermines capacity due to the importance of government spending in shaping productive capital. Our results have serious policy implications for the implementation and design of fiscal adjustment programmes.

Suggested Citation

  • Ioanna Bardaka & Ioannis Bournakis & Georgia Kaplanoglou, 2018. "Total factor productivity (TFP) and fiscal consolidation: how harmful is austerity?," Working Papers 255, Bank of Greece.
  • Handle: RePEc:bog:wpaper:255
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    Keywords

    total factor productivity; fiscal consolidation; OECD countries; austerity; growth;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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