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

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  • Briotti, Maria Gabriella

Abstract

The paper reviews the theoretical and empirical literature that has investigated the conditions under which a contradictionary 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. JEL Classification: E62, E63, H62, H63

Suggested Citation

  • Briotti, Maria Gabriella, 2005. "Economic reactions to public finance consolidation: a survey of the literature," Occasional Paper Series 38, European Central Bank.
  • Handle: RePEc:ecb:ecbops:200538
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpops/ecbocp38.pdf
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    References listed on IDEAS

    as
    1. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    2. 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.
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    More about this item

    Keywords

    balanced budget; balanced budget multiplier; budget constraint; crowding out; Debt; deficit; fiscal policy; macroeconomic stabilisation; ricardian equivalence;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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