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Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects

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  • Mr. Alberto Alesina
  • Mr. Roberto Perotti

Abstract

This paper studies how the composition of fiscal adjustments influences their likelihood of “success”, defined as a long lasting deficit reduction, and their macroeconomic consequences. We find that fiscal adjustments which rely primarily on spending cuts on transfers and the government wage bill have a better chance of being successful and are expansionary. On the contrary fiscal adjustments which rely primarily on tax increases and cuts in public investment tend not to last and are contractionary. We discuss alterative explanations for these findings by studying both a full sample of OECD countries and by focusing on three case studies: Denmark, Ireland and Italy.

Suggested Citation

  • Mr. Alberto Alesina & Mr. Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Working Papers 1996/070, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:1996/070
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    References listed on IDEAS

    as
    1. Perotti, Roberto, 1996. "Fiscal Consolidation in Europe: Composition Matters," American Economic Review, American Economic Association, vol. 86(2), pages 105-110, May.
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    9. Baxter, M., 1992. "Financial Market Linkages and the International Transmission of Fiscal Policy," RCER Working Papers 336, University of Rochester - Center for Economic Research (RCER).
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    More about this item

    Keywords

    WP; government wage; substitution effect; union-government negotiations; wage moderation; consumer confidence; exchange rate; government employment; party government; nonwage government consumption; Nonwage govt; Fiscal consolidation; Labor costs; Public sector wages;
    All these keywords.

    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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