Working Paper: CEPR ID: DP12655
Authors: Alberto Alesina; Carlo A. Favero; Francesco Giavazzi
Abstract: This paper summarizes the results of a large recent literature on multi year fiscal plans for deficit reduction (austerity). The key results are that deficit reduction policies based upon spending cuts are much less costly in terms of short run output losses than tax based adjustments. On average fiscal adjustment based upon spending cuts have very samll otput costs and in come cases they are expansionary. We then discuss which possible models can explain these findings and discuss how the evidence can disentangle them.
Keywords: austerity
JEL Codes: H60; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal adjustments based on spending cuts (EB plans) (E62) | smaller output losses (F12) |
| Fiscal adjustments based on tax increases (TB plans) (H69) | larger output losses (F69) |
| Fiscal adjustments based on spending cuts (EB plans) (E62) | immediate increases in GDP growth (E20) |
| multi-year fiscal plans (H68) | accurate assessment of effects on macroeconomic variables (E60) |