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What Determines the Duration of a Fiscal Consolidation Program?

Author

Listed:
  • Luca Agnello

    (Banque de France and University of Palermo)

  • Vitor Castro

    (University of Coimbra, GEMF and NIPE)

  • Ricardo M. Sousa

    (University of Minho, NIPE, London School of Economics and FMG)

Abstract

This paper assesses the determinants of the length of fiscal consolidation using annual data for 17 industrial countries over the period 1978-2009. Relying on a narrative approach to identify fiscal consolidation episodes, we show that fiscal variables (such as the budget deficit and the level of public debt) and economic factors (such as the degree of openness, the inflation rate, the interest rate and per capita GDP) are crucial for the fiscal consolidation process. Additionally, we employ continuous and discrete-time duration analyses over a set of consolidation spells and find that evidence of positive duration dependence, i.e., as time goes by, the likelihood of a fiscal consolidation ending is higher. However, more flexible polynomial-in-time, time-dummies and cubic-splines specifications suggest that the hazard function is not monotonic: indeed, it increases until the eighth or ninth year and starts decreasing afterwards. We also find that: (i) spending-driven consolidations are shorter than tax-driven consolidations; (ii) both types of consolidation are longer in Non-European countries than for European countries; and (iii) the size of the consolidation program (in percentage of GDP) does not significantly affect duration. All in all, our results support the importance of cuts in government spending as a way of bringing economies into a sustainable path for public debt. Moreover, they highlight the role played by a fiscal framework that imposes discipline in governments as a device to credibly shorten the length of fiscal consolidation episodes.

Suggested Citation

  • Luca Agnello & Vitor Castro & Ricardo M. Sousa, 2013. "What Determines the Duration of a Fiscal Consolidation Program?," GEMF Working Papers 2013-09, GEMF, Faculty of Economics, University of Coimbra.
  • Handle: RePEc:gmf:wpaper:2013-09.
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    References listed on IDEAS

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    Cited by:

    1. Agnello, Luca & Sousa, Ricardo M., 2015. "Can re-regulation of the financial sector strike back public debt?," Economic Modelling, Elsevier, vol. 51(C), pages 159-171.
    2. Vítor Castro & Megumi Kubota, 2013. "Duration dependence and change-points in the likelihood of credit booms ending," NIPE Working Papers 09/2013, NIPE - Universidade do Minho.
    3. Castro, Vítor, 2017. "The impact of fiscal consolidations on the functional components of government expenditures," Economic Modelling, Elsevier, vol. 60(C), pages 138-150.
    4. Vitor Castro, 2016. "On the behaviour of the functional components ofgovernment expenditures during fiscal consolidations," NIPE Working Papers 11/2016, NIPE - Universidade do Minho.
    5. repec:mje:mjejnl:v:13:y:2017:i:3:p:135-148 is not listed on IDEAS
    6. Enrique Alberola-Ila & Ricardo Sousa, 2017. "Assessing fiscal policy through the lens of the financial and the commodity price cycles," BIS Working Papers 638, Bank for International Settlements.
    7. David Lodge & Marta Rodriguez-Vives, 2013. "How long can austerity persist? The factors that sustain fiscal consolidations," European Journal of Government and Economics, Europa Grande, vol. 2(1), pages 5-24, June.
    8. Hammoudeh, Shawkat & Nguyen, Duc Khuong & Sousa, Ricardo M., 2015. "US monetary policy and sectoral commodity prices," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 61-85.
    9. repec:sos:sosjrn:170406 is not listed on IDEAS
    10. Etoundi Atenga, Eric Martial, 2017. "On the Determinants of output Co-movements in the CEMAC Zone:Examining the Role of Trade, Policy Channel, Economic Structure and Common Factors," MPRA Paper 82091, University Library of Munich, Germany.
    11. repec:kap:itaxpf:v:24:y:2017:i:3:d:10.1007_s10797-016-9428-x is not listed on IDEAS
    12. repec:kap:pubcho:v:171:y:2017:i:3:d:10.1007_s11127-017-0441-0 is not listed on IDEAS
    13. Brigitte Granville & Dominik Nagly, 2015. "Conflicting Incentives for Public Support for EMU," Manchester School, University of Manchester, vol. 83, pages 142-157, December.
    14. repec:mje:mjejnl:v:12:y:2017:i:3:p:135-148 is not listed on IDEAS

    More about this item

    Keywords

    fiscal consolidations; duration analysis; Weibull model; cubic splines.;

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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