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The Effects of Fiscal Consolidations: Theory and Evidence

Listed author(s):
  • Alberto Alesina
  • Omar Barbiero
  • Carlo Favero
  • Francesco Giavazzi
  • Matteo Paradisi

We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, finding details on over 3500 measures. Government spending and transfer cuts reduce output by less than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigates the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices. This channel explains different sizes of multipliers found in fiscal stimuli compared to consolidation plans.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23385.

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Date of creation: May 2017
Handle: RePEc:nbr:nberwo:23385
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