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Economic reactions to public finance consolidation - a survey of the literature

  • Maria Gabriella Briotti
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    The paper reviews the theoretical and empirical literature that has investigated the conditions under which a contractionary fiscal policy is effective in reducing debt and deficit, but does not have a negative effect on growth. The issue is central to macroeconomics and policy making, given that many countries are currently facing increasing fiscal imbalances, with additional pressure coming in the medium term from population ageing. The paper concludes that the theoretical impact of fiscal policy on aggregate demand and economic activity depends largely on the conceptual framework considered and its assumptions about the world. Empirical studies based on macro-econometric model simulations find evidence that fiscal consolidations lead initially to production losses, while they can result in a higher output in the medium term. Empirical studies focusing on episodes of changes in fiscal policies provide in turn evidence that under certain circumstances austerity measures may have an expansionary impact on the economy.

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    File URL: http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp38.pdf
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    Paper provided by European Central Bank in its series Occasional Paper Series with number 38.

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    Length: 29 pages
    Date of creation: Oct 2005
    Date of revision:
    Handle: RePEc:ecb:ecbops:20050038
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    1. Alan Sutherland, . "Fiscal Crises and Aggregate Demand: Can High Public Debt Reverse the Effects of Fiscal Policy?," Discussion Papers 95/17, Department of Economics, University of York.
    2. Fernando Gonzalez & François Haas & Ronald Johannes & Mattias Persson & Liliana Toledo & Roberto Violi & Martin Wieland & Carmen Zins, 2004. "Market dynamics associated with credit ratings - a literature review," Occasional Paper Series 16, European Central Bank.
    3. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
    4. Vincent Hogan, 2004. "Expansionary Fiscal Contractions? Evidence from Panel Data," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 647-659, December.
    5. Giavazzi, Francesco & Jappelli, Tullio & Pagano, Marco, 2000. "Searching for non-linear effects of fiscal policy: Evidence from industrial and developing countries," European Economic Review, Elsevier, vol. 44(7), pages 1259-1289, June.
    6. Ignazio Angeloni & Michael Flad & Francesco Paolo Mongelli, 2005. "Economic and monetary integration of the new Member States - helping to chart the route," Occasional Paper Series 36, European Central Bank.
    7. Francesco Giavazzi & Tullio Jappelli & Marco Pagano, . "Searching for Non-Keynesian Effects of Fiscal Policy," Working Papers 136, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    8. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
    9. Andrea Enria & Lorenzo Cappiello & Frank Dierick & Sergio Grittini & Andrew Haralambous & Angela Maddaloni & Philippe Molitor & Fatima Pires & Paolo Poloni, 2004. "Fair value accounting and financial stability," Occasional Paper Series 13, European Central Bank.
    10. ., 2004. "Market dynamics associated with credit ratings: a literature review," Financial Stability Review, Banque de France, issue 4, pages 77-93, June.
    11. Angela Maddaloni & Darren Pain, 2004. "Corporate ‘excesses’ and financial market dynamics," Occasional Paper Series 17, European Central Bank.
    12. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
    13. Perotti, Roberto, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series 0168, European Central Bank.
    14. Claus Brand & Dieter Gerdesmeier & Barbara Roffia, 2002. "Estimating the trend of M3 income velocity underlying the reference value for monetary growth," Occasional Paper Series 03, European Central Bank.
    15. Henrik Enderlein & Johannes Lindner & Oscar Calvo-Gonzalez & Raymond Ritter, 2005. "The EU budget – how much scope for institutional reform?," Occasional Paper Series 27, European Central Bank.
    16. Alberto Musso & Thomas Westermann, 2005. "Assessing potential output growth in the euro area - a growth accounting perspective," Occasional Paper Series 22, European Central Bank.
    17. Francesco Mazzaferro & Arnaud Mehl & Michael Sturm & Christian Thimann & Adalbert Winkler, 2002. "Economic relations with regions neighbouring the euro area in the ‘euro time zone," Occasional Paper Series 07, European Central Bank.
    18. Andrea Zaghini, 1999. "The economyc policy of fiscal consolidations: The european experience," Temi di discussione (Economic working papers) 355, Bank of Italy, Economic Research and International Relations Area.
    19. Gabriele Giudice & Alessandro Turrini & Jan in 't Veld, 2003. "Can fiscal consolidations be expansionary in the EU? Ex-post evidence and ex-ante analysis," European Economy - Economic Papers 195, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    20. Adalbert Winkler & Francesco Mazzaferro & Carolin Nerlich & Christian Thimann, 2004. "Official dollarisation/euroisation - motives, features and policy implications of current cases," Occasional Paper Series 11, European Central Bank.
    21. Guido Wolswijk & Jakob de Haan, 2005. "Government debt management in the euro area - recent theoretical developments and changes in practices," Occasional Paper Series 25, European Central Bank.
    22. Michael Sturm & Nikolaus Siegfried, 2005. "Regional monetary integration in the member states of the Gulf Cooperation Council," Occasional Paper Series 31, European Central Bank.
    23. Axel Schimmelpfennig & Selma Mahfouz & Richard Hemming, 2002. "Fiscal Policy and Economic Activity During Recessions in Advanced Economies," IMF Working Papers 02/87, International Monetary Fund.
    24. Jürgen von Hagen & Andrew Hughes Hallett & Rolf Strauch, 2001. "Budgetary Consolidation in EMU," European Economy - Economic Papers 148, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    25. Luiz de Mello & Per Mathis Kongsrud & Robert W.R. Price, 2004. "Saving Behaviour and the Effectiveness of Fiscal Policy," OECD Economics Department Working Papers 397, OECD Publishing.
    26. Henning Ahnert & Geoff Kenny, 2004. "Quality adjustment of European price statistics and the role for hedonics," Occasional Paper Series 15, European Central Bank.
    27. Filippo Altissimo & Evaggelia Georgiou & Teresa Sastre & Maria Teresa Valderrama & Gabriel Sterne & Marc Stocker & Mark Weth & Karl Whelan & Alpo Willman, 2005. "Wealth and asset price effects on economic activity," Occasional Paper Series 29, European Central Bank.
    28. C. John McDermott & Robert F. Wescott, 1996. "An Empirical Analysis of Fiscal Adjustments," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 725-753, December.
    29. Véronique Genre & Daphne Momferatou & Gilles Mourre, 2005. "Wage diversity in the euro area - an overview of labour cost differentials across industries," Occasional Paper Series 24, European Central Bank.
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