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Non-Keynesian effects of fiscal contraction in new member states

  • Rzonca, Andrzej
  • Cizkowicz, Piotr

Many economists are convinced that longer-term benefits from fiscal consolidation are in a trade-off with short-term deceleration in output growth. However, more recent research suggests that curbing fiscal imbalances contributes to faster growth already in the short term. This paper is about such non-Keynesian effects. Section two systematizes theoretical explanations. Section three reviews previous empirical research. Section four uses panel estimation techniques to examine the consequences of fiscal consolidation in New Member States. This analysis provides evidence that in those countries fiscal consolidation contributed substantially to the acceleration of output growth even in the short term. However, the exact channels through which non-Keynesian effects occurred could not be unambiguously identified in the paper. Section five takes the new step of a qualitative analysis of the outcomes of strong fiscal adjustments in the countries under consideration. That analysis shows that their experiences were quite similar to those of developed countries. JEL Classification: E62, E65, C33

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Paper provided by European Central Bank in its series Working Paper Series with number 0519.

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Date of creation: Sep 2005
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Handle: RePEc:ecb:ecbwps:20050519
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  1. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  2. Pagès, Henri & Humphrey, David, 2005. "Settlement finality as a public good in large-value payment systems," Working Paper Series 0506, European Central Bank.
  3. Gruener Hans Peter & Hayo Bernd & Hefeker Carsten, 2009. "Unions, Wage Setting and Monetary Policy Uncertainty," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-25, October.
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