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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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    Citations

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    Cited by:

    1. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2012. "Fiscal Policy and Learning," CEPR Discussion Papers 8891, C.E.P.R. Discussion Papers.
    2. Cimadomo, Jacopo & Bénassy-Quéré, Agnès, 2012. "Changing patterns of fiscal policy multipliers in Germany, the UK and the US," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 845-873.
    3. Martin Melecky & Evgenij Najdov, 2010. "Comparing constraints to economic stabilization in Macedonia and Slovakia: macroestimates with micronarratives," Applied Financial Economics, Taylor & Francis Journals, vol. 20(9), pages 681-699.
    4. António Afonso, 2010. "Expansionary fiscal consolidations in Europe: new evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 17(2), pages 105-109, January.
    5. Frank Dierick & Fatima Pires & Martin Scheicher & Kai Gereon Spitzer, 2005. "The New Basel Capital Framework and its implementation in the European Union," Occasional Paper Series 42, European Central Bank.
    6. Jonas Fischer & Lars Jonung & Martin Larch, 2007. "101 Proposals to reform the Stability and Growth Pact. Why so many? A Survey," European Economy - Economic Papers 2008 - 2015 267, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. Sebastian Hauptmeier & Martin Heipertz & Ludger Schuknecht, 2007. "Expenditure Reform in Industrialised Countries: A Case-Study Approach," Fiscal Studies, Institute for Fiscal Studies, vol. 28(3), pages 293-342, September.
    8. Şen, Hüseyin & Kaya, Ayşe, 2017. "How large are fiscal multipliers in Turkey?," EconStor Preprints 162763, ZBW - German National Library of Economics.
    9. Canale, Rosaria Rita & Napolitano, Oreste, 2009. "The recessive attitude of EMU policies: reflections on the italian experience, 1998–2008," MPRA Paper 20207, University Library of Munich, Germany.
    10. repec:erc:cypepr:v:11:y:2017:i:2:p:19-62 is not listed on IDEAS
    11. Sophocles Brissimis & George Hondroyiannis & Christos Papazoglou & Nicholas Tsaveas & Melina Vasardani, 2013. "The determinants of current account imbalances in the euro area: a panel estimation approach," Economic Change and Restructuring, Springer, vol. 46(3), pages 299-319, August.
    12. Adalbert Winkler & Roland Beck, 2006. "Macroeconomic and financial stability challenges for acceding and candidate countries," Occasional Paper Series 48, European Central Bank.
    13. Siliverstovs, Boriss & Kholodilin, Konstantin A. & Thiessen, Ulrich, 2011. "Does aging influence structural change? Evidence from panel data," Economic Systems, Elsevier, vol. 35(2), pages 244-260, June.
    14. Zeilbeck, Severin, 2015. "An investment initiative for fiscally constrained EU member states: The role of synergetic financial instruments," IPE Working Papers 58/2015, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    15. António Afonso, 2007. "Expansionary fiscal consolidations in Europe: part of conventional wisdom?," Money Macro and Finance (MMF) Research Group Conference 2006 50, Money Macro and Finance Research Group.
    16. repec:gam:jecomi:v:5:y:2017:i:4:p:37-:d:113921 is not listed on IDEAS
    17. Magazzino, Cosimo, 2011. "The nexus between public expenditure and inflation in the Mediterranean countries," MPRA Paper 28493, University Library of Munich, Germany.
    18. Maria Gabriella Briotti, 2005. "Economic reactions to public finance consolidation - a survey of the literature," Occasional Paper Series 38, European Central Bank.
    19. Dierick, Frank & Pires, Fatima & Scheicher, Martin & Spitzer, Kai Gereon, 2005. "The New Basel Capital Framework and its implementation in the European Union," Occasional Paper Series 42, European Central Bank.

    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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