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When Are Fiscal Contractions Successful? Lessons for Countries Within and Outside the EMU

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Abstract

In the past 25 years, many OECD countries have implemented fiscal contractions to strengthen their public finances. The macroeconomic outcomes of these efforts have varied. With the aid of an econometric model, this paper seeks to identify the factors that make contractions successful from a macroeconomic standpoint. The findings suggest, among other things, that favorable changes in the real exchange rate prior to the period of fiscal contraction and in the real quantity of money during this period play an important part in the macroeconomic outcome. This indicates in turn that it may be more difficult to implement successful fiscal contractions within the EMU. The findings also show that the composition of the contraction in regard to the relative proportions of tax increases and expenditure cutbacks, respectively, is probably less important than has usually been assumed.

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  • Hjelm, Göran, 2004. "When Are Fiscal Contractions Successful? Lessons for Countries Within and Outside the EMU," Working Papers 92, National Institute of Economic Research.
  • Handle: RePEc:hhs:nierwp:0092
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    References listed on IDEAS

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    3. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122, National Bureau of Economic Research, Inc.
    4. Roberto Perotti, 1999. "Fiscal Policy in Good Times and Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1399-1436.
    5. Hjelm, Goran, 2002. "Is private consumption growth higher (lower) during periods of fiscal contractions (expansions)?," Journal of Macroeconomics, Elsevier, vol. 24(1), pages 17-39, March.
    6. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    7. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
    8. Davidson, Russell & MacKinnon, James G., 1989. "Testing for Consistency using Artificial Regressions," Econometric Theory, Cambridge University Press, vol. 5(3), pages 363-384, December.
    9. Ardagna, Silvia & Alesina, Alberto, 1998. "Tales of Fiscal Adjustment," Scholarly Articles 2579822, Harvard University Department of Economics.
    10. Hjelm, Goran, 2002. " Effects of Fiscal Contractions: The Importance of Preceding Exchange Rate Movements," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 423-441, September.
    11. repec:oup:ecpoli:v:13:y:1998:i:27:p:487-545 is not listed on IDEAS
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Fiscal Contractions; Fiscal Policy; Real Exchange Rate; EMU;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • 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
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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